Until this week, Peshawar's Pearl Continental hotel was a rare island of air-conditioned calm in an increasingly dangerous country, for foreigners and local elites only of course. Its bombing this week is a crude but effective reminder that the Taliban is not a spent force.

Peshawar, the restless capital of Pakistan's North West Frontier Province, has had many visitors over the past several years. A key outpost on the long trading route that links south with central Asia, for centuries it has been famed as an enchanted if sleepy backwater where anything from liquor to the latest computers could be purchased for a price.

That character has changed these past few years. This week's massive bomb blast at the city's premier hotel affirmed Peshawar's transformation into one of the key battlegrounds in the war against the Taliban.

Whether the attack was aimed directly at aid agencies delivering humanitarian goods to the families displaced by the war in the NWFP is unclear. But the murder of three UN Food Programme employees along with eight others has for the moment stalled international efforts to deliver humanitarian assistance to the vast numbers made homeless by this war.

The attack on the Peshawar Pearl Continental may have had an added meaning for the United States. The US was on the cusp of completing a deal for its purchase as part of a massive expansion of its Peshawar consulate, a key base for the co-ordination of American intelligence in this region. The consulate expansion was part of the $1bn (£607m) project that will see its missions in Afghanistan and Pakistan expanded ever further.

Just as the Islamabad Marriott appeared to be targeted in last September's massive bomb blast because it was frequented by foreign diplomats and American intelligence operatives, the Peshawar Pearl Continental was often frequented by American embassy and intelligence staff and, possibly, their local operatives. The hotel was also frequented by American officials in the 1980s, only in those days they were co-ordinating efforts to arm the most radical, Islamist militants they could muster to fight the godless communists in Afghanistan.

Already there is an almost total disconnect between Pakistanis and the several hundreds of Americans and other foreign government workers living in Peshawar and other parts of Pakistan. One rarely meets foreigners in any part of Pakistan these days. The latest string of bombings will exacerbate that disconnect. In Peshawar, ordinary citizens are increasingly avoiding the markets and bazaars for fear of being the next victims of a bomb attack. As one mother in the University Town district told me last week, her son's appointment with the dentist was cut short because the police had received threats that a car laden with explosives was parked around the corner. The dental practice happened to be located close to an office of the Awami National Party, a secular Pashtun nationalist political party currently in government in the NWFP. Thankfully, on that occasion, there was no blast. But many are wondering when their luck will run out.

Spare a thought for those who have already faced the worst of fates. The millions made homeless by the conflict were already struggling under the sweltering heat with only minimal access to water, food and electricity. Many, although far from all, were totally reliant on humanitarian aid from UN-coordinated international relief efforts. The UN's decision to pull out of those efforts owing to the security situation leaves these communities in unimaginably worse conditions than before. Compounding this hell, the numbers of displaced are expected to rise.

Under immense pressure from the United States, the Pakistan army has expanded its operations in the NWFP to include Orakzai and the Waziristan tribal agencies and Bannu, along the border with Afghanistan but well to the south of the Swat valley. Although largely cleared of Taliban control, operations continue in the Swat valley where pockets of insurgents remain.

The simple truth is that it is unclear how deeply the Taliban and those sympathetic to its cause – to establish an Islamic state along rigid, literal interpretations of scripture as in Afghanistan under the Taliban – have infiltrated deeper into Pakistan.

For years now it has been an open secret that the Afghan Taliban, who with a few exceptions has chosen not to get embroiled in the conflict within Pakistan, has run safe houses in northern Balochistan. Many of its and the Pakistani Taliban's footsoldiers are recruited from the large pool of poor young men of southern Punjab's Seraiki belt, particularly among the Waraich clan that the Mughals and British considered one of the great "martial races" of the subcontinent.

In short, the latent potential of a broader Taliban insurgency in Pakistan remains strong. As it remains in the international spotlight, Pakistan is in the unenviable position of having to prove that it is capable of defeating the Taliban while, at the same time, ensuring it does not splinter the broad network of largely NWFP-based Taliban militants into the rest of the country. It is the stuff of a general's worst nightmares.