Prime Minister Binyamin Netanyahu believes he has turned a corner in his difficult relationship with the American administration and that peace talks are now possible without a commitment to freeze building in east Jerusalem.
It has been almost two months since the Obama administration requested clear answers from the Israeli government over whether it would freeze building in east Jerusalem in order to renew talks with the Palestinians. This week, government sources acknowledged that "we told the White House that we could not possibly announce an official freeze, but at the same time, we gave them assurances that while the talks are going on, there will be no significant progress on building projects."
The American administration's pro-Israel PR campaign in recent days has led Mr Netanyahu's advisors to believe that, while this was not the answer the White House was hoping for, "they realise that this is the way forward", according to one senior aide.
"It seems that the Americans now understand that they went too far pressuring Bibi," he said, "and that there are just some things he can't do with his coalition. That's why, for now, the pressure has been reduced."
Meanwhile an unlikely voice has been added to the debate over building in Jerusalem. Four weeks ago, President Shimon Peres visited Shas's spiritual leader, Rabbi Ovadya Yossef, at his home in Jerusalem. According to a report in Maariv, Rabbi Yossef told Mr Peres that Israel could agree to a temporary freeze in building in east Jerusalem and that "we have to do everything to get along with the Americans and pay any price to repair the relations. We must not do anything to provoke the nations."
His remarks were significant because it is Shas's political leader, Interior Minister Eli Yishai, who was blamed for allowing a building project in northeast Jerusalem to be announced during Vice President Joe Biden's visit to Israel in March, sparking the rift with the American administration.
But Mr Yishai insisted that "I have express orders from [Rabbi Yossef] to oppose any freeze in Jerusalem".
One source close to Rabbi Yossef said that "the rabbi's position is that we should freeze building if that is what is needed to save relations with America. Yishai is opposing it so as not to give in to the Americans too easily but if Bibi decides to freeze, all of Shas will go along with it. Netanyahu won't lose his coalition over this."
Mr Netanyahu is not out of the woods yet. In September, the 10-month freeze period on building in the West Bank will come to an end. He is already being pressured from elements within his party and coalition members Shas and Yisrael Beiteinu to announce that the freeze will not be extended. Meanwhile he has received messages from the State Department that a return to building in the settlements will mean an immediate end to talks and another downturn in Israel-America relations.