Hillary Rodham Clinton tiptoed oh-so-carefully around the Israel-Palestine issue on her recent trip to the Middle East.

But she and President Obama will have to make some tough decisions soon, as Israeli Prime Minister-designate Benjamin Netanyahu prepares to form a right-wing government. Otherwise, any prospects for a two-state solution, even in the long run, will be dead before the end of Obama’s first term.

Netanyahu is a smooth politician with perfect American English (he attended Cheltenham High School outside Philadelphia). But his policies are likely to complicate nearly every aspect of Obama’s strategy for the Mideast — including the Palestinian issue, and new approaches toward Syria and Iran.

Inflammatory choice

For starters, Netanyahu appears to have chosen Avigdor Lieberman as future foreign minister, a figure whose inflammatory views may undercut any new peace moves in the region. Lieberman has suggested that Egyptian President Hosni Mubarak “go to hell,” and proposed that Israel bomb the Aswan Dam in the event of war with Egypt. Recall that Egypt, with whom Israel has a peace treaty, is a crucial mediator in trying to find some solution for the continuing crisis in Gaza.

Lieberman, a onetime member of the racist Kach Party (before it was banned in Israel), is also notorious for calling on Israel to rid itself of most of its Arab citizens and relocate them to a future Palestinian Arab “entity.” Netanyahu tapped Lieberman because he needed the latter’s party, Yisrael Beitenu (Israel Is Our Home), to form a ruling coalition. But the presence of such an outrageous figure will complicate uphill efforts to restart Israeli-Arab talks.

As for such talks, Netanyahu doesn’t believe in the concept of a sovereign Palestinian state living alongside Israel. But unless a viable formula is found for a two-state solution, Israel will remain in permanent occupation of more than 3 million bitter Palestinians. That is a prescription for endless, poisonous Israeli-Arab war.

The Israeli leader argues, moreover, that the only correct avenue toward peace is to first pursue Palestinian economic development, and consign any negotiations on sovereignty to the indefinite future. This approach is nothing but a Middle Eastern mirage. It has failed many times in the past.

Economy, politics tied

Anyone who has driven around the West Bank would understand that economic development depends on political progress. West Bank land is divided into cantons by Israeli settlements and roads that are designed to prevent any coherent territorial entity or political opposition.

And then there is Gaza. Even before Hamas took power there, Israel’s fear of Palestinian infiltration had led to constant Israeli blockages of imports and exports from Gaza. Such uncertainty makes it impossible for Palestinian industries to develop, and ensures that foreign investors are unwilling to risk their money.

Even when the United States paid for pricey security equipment to scan containers exiting Gaza, easy movement of goods never materialized. And these days, only humanitarian supplies are permitted into this desolate strip of land. Bottom line: Without progress on Palestinian political issues (of which progress on security is a subset), forget economic progress.

This leads to the first decision for Obama: He must declare his administration believes “economic peace” cannot substitute for political progress. He should make clear that his administration will pursue the two-state solution.

However, given the hawkish leadership in Jerusalem, and the weak Palestinian leadership in Ramallah, it may not be possible to move directly to political talks. In that case, Obama must ensure that the situation on the West Bank and Gaza doesn’t worsen so much that peace talks cannot be resumed later. And he must give Palestinians some real reason to hope.

Settlements must stop

That requires a second decision: The president should firmly confront the new Israeli government on the issue of settlement expansion, making clear that such expansion contradicts our security interests — and theirs.

According to the Israeli group Peace Now, which closely tracks settlements, the Israeli government is planning to build more than 73,000 housing units in the West Bank, doubling the settler population there. Without a freeze on all settlement construction, the prospect for a viable Palestinian state will soon disappear.

Netanyahu has said he supports “natural growth,” meaning the expansion of existing settlements. If Obama is unwilling to oppose this, he should admit the two-state solution is dead.

Possible Syria role

The third decision revolves around talks with Syria. Even if talks with the Palestinians cannot be revived quickly, there may be hopeful prospects for negotiations with Damascus.

Israel’s military intelligence is said to strongly favor such talks: If Syria could be wooed away from its alliance with Iran, this would undercut the strength of Hezbollah in Lebanon and Hamas in Gaza. And progress on Syria would give Obama more cards to play in diplomatic overtures to Tehran.

Turkey had mediated indirect talks between Syria and Israel before Israel’s elections. The Bush administration was cool to Turkey’s move; it wanted to isolate Syria. But Obama backs a thaw; Clinton has dispatched emissaries to Damascus.

In his election campaign, Netanyahu swore he would never return the Golan Heights to Syria. He says he’s willing to talk, but he hasn’t said he’s open to giving back territory.

Obama must try to convince Netanyahu that such an effort is in Israel’s interest, and decide how hard to push if the Israeli leader resists. This is a crucial moment: The new U.S. president needs to show that, besides being a close ally of Israel, he is committed to a stable Middle East.

With Netanyahu about to form a government, these decisions must be made now.