It is these fundamental divisions that just torpedoed the latest U.S. effort to broker an Israeli-Palestinian peace deal, which Indyk and Secretary of State John Kerry have spent the past nine months trying to midwife. And they're what make Indyk so nervous about the current bout of violence between the two sides, following the murder of three kidnapped Israeli teenagers in the West Bank and the apparent revenge killing of a Palestinian teenager in Jerusalem.

"I fear the worst here," Indyk said. "What you've got now is ... a more rapidly deteriorating situation in which all of the worst fears and worst assumptions about the other side are being confirmed."

Indyk rejected the notion that the Obama administration frittered away precious diplomatic energy on a long-elusive Mideast peace agreement while Syria and Iraq imploded, arguing that Kerry and others didn't forsake those other regional issues.

Instead he delivered a frank postmortem on the process, detailing how excruciatingly close negotiators were to a deal and why they ultimately fell short of one. Initially, Israel agreed to release more than 100 Palestinian prisoners in four stages in return for the Palestinians not signing international conventions or attempting to join UN agencies. After six months of direct negotiations between the parties, he explained, Netanyahu "moved into the zone of a possible agreement" and was prepared to make substantial concessions.

But then, beginning in mid-February, Abbas suddenly "shut down." By the time the Palestinian leader visited Obama in Washington in March, he "had checked out of the negotiations," repeatedly telling U.S. officials that he would "study" their proposals, Indyk said. Abbas later signed 15 international conventions and struck a unity deal with the Gaza-based militant group Hamas. These moves deflated the peace process.

What accounts for Abbas's about-face? The explanation, Indyk says, lies in Jewish settlement activity during the talks. The U.S. had anticipated limited activity in so-called settlement "blocks" near Israel's 1967 borders, where roughly 80 percent of Jewish settlers live.

What caught Washington off guard was the Israeli government's announcements, with each release of Palestinian prisoners, of plans for settlement units, many of which were outside the blocks. "The Israeli attitude is that's just planning," Indyk noted. "But for the Palestinians, everything that gets planned gets built. ... And the fact that the announcements were made when the prisoners were released created the impression that Abu Mazen had paid for the prisoners by accepting these settlement announcements." Netanyahu may have simply been playing domestic politics and trying to placate the Israeli right-wing, but these announcements effectively humiliated Abbas.

Indyk's implicit message appeared to be that Israel's settlement policy inflicted the most harm on the peace process: The settlement announcements undermined Abbas, who in turn walked away from the talks. At one point in the discussion, Indyk observed that Israelis who are moving to settlements for religious and nationalist reasons, especially outside the settlement blocks, "are doing great damage to Israel's future."