One of the most compelling themes of the recent World Economic Forum at Davos, Switzerland, was the urgent need for a breakthrough in the Israeli-Palestinian conflict.

That might seem counterintuitive at a time when the Palestinians are engaged in virtual civil war. Not to mention that Israel’s prime minister is weak, and America is distracted by the Iraq war. But I have never seen moderate Arab leaders so nervous about their region’s future – and so eager to promote Israeli-Palestinian peace.

The chaos in Iraq and the rising power of Iran have opened the horrifying prospect of Sunni-Shiite civil war in the region.

“The Iraq war has opened the doors to hell,” said Amr Moussa, secretary-general of the Arab League at Davos, “and we will all enter if a regional Shia-Sunni conflict emerges.”

These fears have forced Sunni Arab leaders to seek a way to undermine the Islamist radicals who have gained strength from the Iraq conflict. The best way they see is to make dramatic progress on the Israeli-Palestinian issue. (The Palestinian issue is still the most potent pretext for jihadis to rally new recruits to their cause.)

The new Arab plan revolves around the relaunch of the 2002 Saudi peace initiative – in a revised version. That plan called for full recognition of Israel and normalization of relations with all Arab countries in return for Israeli withdrawal to the 1967 borders with slight changes.

The Arab League version of that plan added a call for settling the Palestinian refugee problem according to U.N. resolution 194, which opened the door to a potential influx of Palestinians into Israel proper.

Needless to say, Israel rejected that version. But there were off-the-record hints at Davos that the new plan would be far more attractive to Israel. And, in a November 2006 speech, Israeli Prime Minister Ehud Olmert stressed that aspects of the Saudi plan were positive.

Olmert’s interest stemmed from the strong bond that has emerged recently between Israel and Sunni Arab states: their concern about the rising power of Iran. Indeed, Olmert recently held a secret meeting with Prince Bandar bin Sultan, national security adviser to the Saudi king.

However, there is no indication so far that the Israeli leader accepts the urgency of the Arab approach. Arab leaders want the Palestinians and Israelis to abandon the step-by-step process known as the road map, put together by the Quartet: the United States, the European Union, Russia and the United Nations.

The road map called first for a halt to Palestinian violence and Israeli settlement-building and then for a Palestinian state with temporary borders. But at Davos, Palestinian Authority President Mahmoud Abbas stressed that it was time to “specify the endgame” – the borders of a Palestinian state, status of Jerusalem, etc. Then the sides could negotiate the details and timeline. “I don’t want to beat about the bush and talk about a state with provisional borders,” Abbas told journalists. “This … will not end the conflict.”

Arab leaders believe an agreement on the final outline of a Palestinian state, endorsed by Arab states and the rest of the world, would deflate Islamist radicals. It would undercut Hezbollah in Lebanon, they say, and turn Palestinians against Hamas. (Both groups are backed by Iran.) Then Abbas could hold new elections.

Such a deal, they argue, would also open the door to holding a regional conference on Iraq, including Iran, that could prevent a regional war. “Iran is an octopus, and you must first go after the tentacles,” one prominent Arab told me. “Then you can deal with the head.”

Will Israel or the Bush administration go for such an idea? Israeli Foreign Minister Tsipi Livni talked at Davos of the need for a vision of a Palestinian state, but she stressed a step-by-step process. Secretary of State Condoleezza Rice has given no hint that the Bush team is ready to endorse the details of an endgame. We will know more after the Quartet meets in Washington this week, and Rice returns to the Mideast.

But some members of Israel’s coalition government feel the need for haste. Deputy Defense Minister Ephraim Sneh, a Labor Party member and retired general, told me at Davos: “There is no reason on earth not to go to final status. This is the most important thing that Olmert can do.”

I think Sneh is correct. At a time when the future of the entire Mideast region is at stake, a dramatic move on Mideast peace could undercut the momentum of radical Islamists. The odds are stiff, and the Arab peace plan would have to fully recognize Israel’s right to exist as a Jewish state.

But if that’s the case, Rice, and her boss, should make every effort to promote it. They must not miss any chance to close those Mideast gates of hell.