Israelis grudgingly agreed that the Palestinians’ moderate tone at the Madrid peace talks constituted a significant political advance. Palestinian leaders from the occupied territories may finally have seized center stage from Yasir Arafat and his exile Palestine Liberation Organization. “This is the first time that local Palestinians have rebelled against traditional Arab political extremism, " said Nahum Barnea, columnist for the Hebrew daily Yedioth Ahronoth. But hardline skepticism of the Palestinians’ intentions still dominates Prime Minister Yitzhak Shamir’s government. “We’re dealing with people who have developed political pragmatism, but who still aren’t interested in making concessions,” a Foreign Ministry official said. Israel still holds the high cards: it ordered its Army to disperse the olive-branch marches, Many Palestinians, too, think they have gone too far already toward accommodation. West Bank leader Faisal Husseini has said changing Israeli public opinion should be the “second intifada, " and he has delivered speeches in Hebrew to Israeli audiences. But few other Palestinian leaders seem ready to win over Israeli, rather than international, public opinion. “Unfortunately, [Palestinian leaders] are counting on the Americans to pressure Israel into compromise, and not convincing the Israelis themselves,” said a foreign diplomat in Israel.

No gesture might have more effect on Israelis than a public halt to the nearly four-year-old intifada. The uprising already suffers from severe exhaustion, so abandoning it formally would cost the Palestinians little in practical terms. Still, a public statement to that effect remains politically impossible for Palestinian leaders in the West Bank. Hanan Ashrawi, spokeswoman for the moderate delegation in Madrid, recently insisted that the intifada “is a natural expression of the Palestinian political will” and said it would quicken.

Palestinian peace efforts face opposition from the hard-liners within the Palestinian camp itself. Supporters of PLO breakaway factions, the Popular Front for the Liberation of Palestine, led by George Habash, and the Democratic Front for the Liberation of Palestine, led by Naif Hawatmeh, opposed participation in the Madrid talks. So did the influential Islamic fundamentalist group, Hamas. Such groups may command support from up to 30 percent of local Palestinians. Their call for commercial strikes shut down much of the West Bank and Gaza during the Madrid conference. Riyad al-Malki, the most prominent PFLP supporter in the territories, has promised to make the lives of Palestinian Madrid delegates “a nightmare.” Arafat and his supporters in the West Bank and Gaza may not accept permanent relegation to the sidelines–though many Palestinians privately favor a minimized role for him and more say for local leaders.

The Israeli-Palestinian struggle is more than just a contest over turf. A few years back, a popular play in Tel Aviv depicted Israelis and Palestinians as quibbling over which was history’s greater victim. Israelis held up the Holocaust. Palestinians argued their dispossession. It was a script drawn from daily life.

For years, Israeli policy has relied on the familiar image of Palestinians as hotheads and terrorists. That allowed the Shamir government to justify its own uncompromising stance. Yet the Palestinians also seem trapped in their resentment–and view all Israelis as oppressors.

Further unilateral conciliatory gestures-repudiating the United Nations’ 1975 “Zionism Is Racism” resolution perhaps-will be tough for Palestinians to swallow. But they are necessary. The objective would be to sway Likud voters in Israel toward leaders more attuned to compromise. “It will take a credible Palestinian leadership to convince Israelis that concessions are possible without prejudicing Israeli security,” says Moshe Maoz, a specialist in Mideast relations at Hebrew University in Jerusalem. The Palestinians’ new realism is at least in part a result of Shamir’s intransigence on settlements, as well as other setbacks such as Arafat’s alliance with Saddam Hussein and the arrival of hundreds of thousands of Soviet Jews. Their more thoughtful leaders see compromise as the only realistic alternative to the prospect of large-scale Israeli colonization of the territories, an outcome that could leave Palestinians with no land and few political rights. The question is whether change on the Palestinian side will come in time, or whether Israel has already passed the point of no return on the way to annexation of the occupied territories. The answer hinges in part on whether Palestinians can persuade ordinary Israelis to hold their end of the olive branch.