All eyes are about to be focused on Israel as U.S. President Barack Obama prepares to make his first visit to the Holy Land next week. Israeli Prime Minister Benjamin Netanyahu is expected to have formed a new coalition government by then, but will it pursue Mr. Obama's stated goal and negotiate an end to Israel's 65-year-old conflict with the Palestinians?

Failure to reach an agreement would be a tragedy for Israel, says Ami Ayalon, a former head of the country's internal security force, Shin Bet, whose experience in fighting terrorism has made him an ardent advocate of a two-state solution to the Israeli-Palestinian conflict.

The Israeli film, The Gatekeepers, an Academy Award nominee, grew from an Ayalon peace initiative during the second intifada. In the film, six former directors of Shin Bet said their country's approach to the Palestinians is getting nowhere, and its violence and humiliation of Palestinians was creating more enemies than partners for peace.

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Mr. Ayalon, who became Shin Bet chief in 1996 after Yitzhak Rabin's assassination, was in Canada recently as part of an effort by the Mosaic Institute to engage Jewish and Arab Canadians in a discussion of opportunities for peace.

Israel can "increase confidence that a two-state solution is possible," he said. It should immediately renounce any claim to sovereignty in the West Bank beyond the security barrier and announce it is ready to negotiate an exchange of land, "including a sharing of Jerusalem," to fix the final borders. It should also pass a law to relocate settlers to Israel, "recognizing the contribution they have made to developing the state" and compensating them for giving up their homes.

Is it up to Israel to unilaterally declare an end to settlements?

Today, Palestinians are taking the first step, at least when it comes to [Palestinian Authority leaders] Abu Mazen and Salam Fayyad. They are doing exactly what they should. They are providing security in a way we never imagined they would – they are fighting Hamas in the West Bank. A major part of our security in the West Bank is a result of what they do.

They don't always get recognition for this in Israel, do they?

They get recognition if you ask the military officers in the IDF [Israel Defence Forces] or the professionals in Shin Bet. But publicly, you're right. Our politicians are not giving us the true picture.

If the Israel Defence Forces respect Palestinian security measures, why do Israeli forces still stage nighttime raids into Palestinian areas?

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Confidence is a tricky matter and you have to take risks. This is something we Israelis have a hard time doing. I remember it was almost a daily dilemma: You have some intelligence information, an early warning about a potential threat, and you believe that if you don't stop it, it could develop into a terror attack.

But if we act every time we have a bit of information, we will create a reality that those Palestinians who really want to help us are perceived as Israeli collaborators. If they are constantly humiliated, they will not help us. They will help only as long as their people believe they are doing it to end the occupation and provide a better future.

With everything else that's happening in the Middle East, why does the Israeli-Palestinian conflict still matter so much?

First, it is not the region's major conflict. I think the Shia-Sunni conflict is much more important for most of the people living in the region. But in many cases the conflict is used by leaders so they don't have to deal with certain domestic issues or to create support for Iranian dominance or Turkish dominance, etc. It's very easy to recruit the street if you show the daily pain of the Arab Muslim Palestinians– they are part of the same community, the same religion.

Second, I believe that it became the litmus test of American leadership in the region. America is perceived in recent years as Israel's supporter and not as an honest broker. As long as this conflict is not resolved, or at least does not take another approach, it will remain a major issue for the people in the Arab street and a major cause of anti-American sentiment.

Should Israel be willing to negotiate an agreement with Hamas?

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It is not for me to tell them with whom we should negotiate. It is for the Palestinians to decide.

And if they were to elect someone from Hamas as president?

If they will elect Hamas, then Hamas will have to accept the idea of two states, and that's it. We shall have to negotiate with them. By the way, if you listen to Hamas leaders like Khaled Meshaal, this is what he is saying.

And they wouldn't have to say they accept Israel as a 'Jewish state'?

No. It is for me to decide on the identity of my state. I'm not going to demand that their future state of Palestine be a democracy.

For me, what is important is that Israel will be a safe home for Jewish people and a democracy.

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This interview has been edited and condensed