After last week's suspension of non-lethal aid to the Free Syrian Army by the US and UK, western strategy towards the country lies in tatters. Washington and London were forced to act after Islamist rebels, including the al-Qaida-affiliated Islamic State of Iraq and the Levant, took over the headquarters and warehouses of the western-backed FSA and reportedly seized anti-aircraft and anti-tank missiles, some of which are said to be American-supplied.

This humiliating defeat shows the rise of the Islamist rebels, most of whom oppose political dialogue with President Bashar al-Assad's regime and call for the establishment of a Qur'anic-based state. It also demonstrates the near-collapse of the FSA, which the west had hoped would unify the rebels, lead the campaign to topple Assad, and then take on al-Qaida. Many of the armed groups, including the powerful Islamic Front, say they do not recognise the western-backed political opposition, the Syrian National Coalition, as a legitimate representative and warn it against participating in next month's proposed peace conference in Geneva.

In the past year warfare among the armed rebels has overshadowed the bigger fight against Assad, allowing his forces to gain the upper hand and make tactical gains in Homs, Damascus and even the rebel stronghold Aleppo. Emboldened, Assad and his henchmen, with the backing of Iran and Russia, have repeatedly reminded the opposition they will not go to Geneva to hand over power to a transitional government.

Last week, the US defence secretary, Chuck Hagel, conceded that Washington's approach to Syria is in disarray. Even Russia's foreign minister, Sergei Lavrov, called on the rebels to "avoid discord and unite", reflecting Moscow's anxiety that the opposition's fragmentation does not bode well for the peace talks.

After almost three years of urban warfare, the uprising has mutated and produced unintended consequences. It has been hijacked by religious hardliners, criminal warlords and regional rivalries. The early hopes and dreams of millions of Syrians of an open, inclusive and pluralistic post-Assad government are now buried in the country's killing fields.

From the beginning, the odds were against the nationalist opposition. It was always overwhelmingly dependent on regional powers for military and financial support, which left it vulnerable to external manipulation.

Alongside this, the Obama administration's initial grandstanding – insisting that Assad must step down and that his days were numbered – was not matched by credible strategic planning or an accurate assessment of conditions on the ground. Britain and France repeated the US line without preparing for the fact that Syria could implode and trigger a catastrophic humanitarian crisis, exacerbated by the recent freezing temperatures, and a regional war.

Syria is now mainly a battlefield where Saudi Arabia and Iran are waging a proxy war, with devastating sectarian repercussions. It is doubtful the peace talks can be even convened, let alone produce results, without an implicit understanding between the two warring Gulf powers. While Saudi Arabia exercises considerable influence on Islamist rebels, Iran is crucial to Assad's survival.

Both have much to gain from preventing Syria's implosion. Under its new president, Iran may be willing to cut the umbilical cord with Assad, who has become a big liability for Tehran in the Arab world. Similarly, if Saudi Arabia can use its influence, it may avoid militant Islamist rebels haunting Syria's neighbours for years to come. It is a tall order, but the stakes for the Syrian people and the international community are huge.