BLAIR'S INTENTIONS ON MID-EAST !

By Jeremy Bowen Middle East editor, BBC News.

Tony Blair is settling into his new job. The Middle East envoy of the Quartet of the UN, US, EU and Russia has set himself up in Jerusalem's most beautiful hotel, the American Colony, in a Palestinian district in the Israeli-occupied eastern side of the city. That, in itself, will be taken as a statement of intent.

When I first stayed there 16 years ago a colleague, who didn't like the place much, complained that reporting the conflict from the Colony was like trying to cover the Northern Ireland troubles from the Republican Falls Road. The hotel is staffed by Palestinians, run by a Swiss company and owned by a British family. Diplomats like to stay there and so do journalists (when they can get a room).

For them, the bar is one of the Middle East's great crossroads. Israeli guests are still fairly rare.
There had been talk that the Blair mission would be run from Government House, the palace, now used by the United Nations, which the British built to run Palestine in colonial times. It sits loftily on a rise that is known as the Hill of Evil Counsel, overlooking the domes and spires of the walled Old City of Jerusalem. And Mr Blair chose not to stay at the King David, the most prestigious hotel on the Israeli west side of Jerusalem.

The King David has played its own role in the Arab-Israeli conflict. In 1946, when it was the British military headquarters, 91 people were killed when it was blown up on the orders of Menachem Begin, who went on to be Israel's prime minister and to make peace with Egypt. Urgent priority In Jerusalem every action, even the place you choose to sleep, is scanned for its political meaning. So by staying in East Jerusalem Mr Blair, deliberately or not, is sending out a signal that he wants to engage with Palestinians as well as Israelis.

So a fundamental question remains. How can a sustainable deal be made by Israel and the Palestinians without the participation of Hamas? Perhaps he realises that many people on both sides here believe that he is an instinctive supporter of Israel. So far Mr Blair has only spoken publicly in very general terms about his new job. His seems to be relaxed about his mandate, which officially restricts him to economic and security matters, as they overlap with most of the big issues here.

He has, wisely, kept his plans to himself, because when he unveils his strategy he is going to need to get it right. But intimations of what he has been saying in private meetings have started to trickle out. An urgent priority is the collapse of the economy in the Palestinian territory of Gaza, whose isolation has deepened since Hamas used force to oust its rivals Fatah in June. About 80% of businesses there cannot function since Israel, for what it says are security reasons, has stopped Gazans exporting farm produce and importing most raw materials. The result is that Gaza is even more dependent on inadequate supplies of foreign aid.

On the West Bank, the economy has been crippled by severe restrictions on Palestinians' freedom of movement. Blair visited three Arab countries before reaching Jerusalem on TuesdayHundreds of Israeli roadblocks and checkpoints, and an elaborate system of passes, permissions and papers make it next to impossible to run a business, or to live anything like a normal life. On politics, the BBC has been told that Mr Blair, in private conversations, accepts that the long-term isolation of Hamas is not a solution.

Others, including the former US secretary of state Colin Powell, have said in public that engaging Hamas, whatever you think about them, is unavoidable. But that would require a shift in the Quartet's policy of boycotting Hamas until it abandons violence, recognises Israel and accepts the agreements Palestinians have already made with the Jewish state. One possible way out of the dilemma has been suggested by Ephraim Halevy, the former head of Mossad, Israel's secret intelligence service. He told the BBC that the demand that Hamas recognises Israel should be dropped, if the other two conditions were met.

The main focus for diplomacy at the moment is the proposed Middle East summit in the United States in November. Israeli Prime Minister Ehud Olmert and Palestinian Authority President Mahmoud Abbas are having regular meetings in which they are nibbling at the edges of some of the politically radioactive issues that divide them. No-one is under the illusion that they will make much progress. Their best hope is that they come up with a credible enough plan of action to make the summit worth holding.

Hamas is not included in the dialogue. The government set up by President Abbas to replace the doomed Fatah-Hamas coalition has joined the Quartet's boycott. But Hamas is a political reality, and it has enough support to wreck any arrangement made by Messrs Olmert and Abbas that it did not like. So a fundamental question remains. How can a sustainable deal be made by Israel and the Palestinians without the participation of Hamas? So far, apart from a vague hope that Hamas will wither away under outside pressure, no-one has managed to come up with a credible answer.

Mr Blair is going to be busy. And he must be conscious that his predecessor resigned in frustration.

BBC NEWS REPORT.