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If you think this latest Israeli-American flap was just the same-old-same-old tiff over settlements, then you're clearly not paying attention -- which is how I'd describe a lot of Israelis, Arabs and American Jews today.

This tiff actually reflects a tectonic shift that has taken place beneath the surface of Israel-U.S. relations. I'd summarize it like this: In the last decade, the Israeli-Palestinian peace process -- for Israel -- has gone from being a necessity to a hobby. And in the last decade, the Israeli-Palestinian peace process -- for America -- has gone from being a hobby to a necessity. Therein lies the problem.

The collapse of the Oslo peace process, combined with the unilateral Israeli pullouts from Lebanon and Gaza -- which were followed not by peace but by rocket attacks by Hezbollah and Hamas on Israel -- decimated Israel's peace camp and the political parties aligned with it.

At the same time, Israel's erecting of a wall around the West Bank to prevent Palestinian suicide bombers from entering Israel (there have been no successful attacks since 2006), along with the rise of the high-tech industry in Israel -- which does a great deal of business digitally and over the Internet and is largely impervious to the day-to-day conflict -- has meant that even without peace, Israel can enjoy a very peaceful existence and a rising standard of living.

To put it another way, the collapse of the peace process, combined with the rise of the wall, combined with the rise of the Web, has made peacemaking with Palestinians much less of a necessity for Israel and much more of a hobby. Consciously or unconsciously, a lot more Israelis seem to believe they really can have it all: a Jewish state, a democratic state and a state in all of the land of Israel, including the West Bank -- and peace.

Why not? Newsweek's Dan Ephron wrote in the Jan. 11, 2010, issue: "An improved security situation, a feeling that acceptance by Arabs no longer matters much, and a growing disaffection from politics generally have, for many Israelis, called into question the basic calculus that has driven the peace process. Instead of pining for peace, they're now asking: who needs it? ... Tourism hit a 10-year high in 2008. Astonishingly, the IMF projected recently that Israel's GDP will grow faster in 2010 than that of most other developed countries. In short, Israelis are enjoying a peace dividend without a peace agreement."

Now, in the same time period, America went from having only a small symbolic number of soldiers in the Middle East to running two wars there (Iraq and Afghanistan) as well as a global struggle against violent Muslim extremists. With U.S. soldiers literally walking the Arab street -- and, therefore, more in need than ever of Muslim good will to protect themselves and defeat the extremists -- Israeli-Palestinian peace has gone from being a post-Cold War hobby of U.S. diplomats to being a necessity.

Both Vice President Joe Biden and Gen. David Petraeus have been quoted recently as saying that the festering Israeli-Palestinian conflict foments anti-U.S. sentiments, because of the perception that America usually sides with Israel, and these sentiments are exploited by al-Qaida, Hamas, Hezbollah and Iran to generate anti-Americanism that complicates life for our soldiers in the region. I wouldn't exaggerate this, but I would not dismiss it either.

The issue that should make peacemaking a necessity rather than a hobby for both the United States and Israel is confronting a nuclear Iran. Unfortunately, Israel sees the question of preventing Iran from going nuclear as overriding and separate from the Palestinian issue, while the United States sees them as integrated. At a time when the United States is trying to galvanize a global coalition to confront Iran, at a time when Iran uses the ongoing Palestinian-Israeli conflict to embarrass pro-U.S. Arabs and extend its influence across the Muslim world, peace would be a strategic asset for America and Israel.

Ari Shavit, a columnist for the Israeli daily Haaretz, last week argued that Israel should adopt a more integrated view -- which he calls a "Palestine-Iran-Palestine" strategy: Israel should take the initiative with an overture to the Palestinians, which would make progress on that front easier, which would strengthen the U.S. coalition against Iran, which could ultimately weaken Tehran and its allies, Hamas and Hezbollah, which would open the way for more progress on the Palestine-Israel front. He suggests that Israel reach an interim agreement with Palestinians on the West Bank or even consider a partial, unilateral withdrawal there.

"One way or another," said Shavit, "Netanyahu should have made a genuine move on the Palestinian front that would have made genuine moves on the Iranian front possible, that would have made dealing with the core of the Israeli-Palestinian dispute possible at a later stage."

Jerusalem, settlements, peace, Iran -- they're all connected, and pretending you can treat some as a hobby and one as a necessity is an illusion.

Thomas Friedman is a columnist for The New York Times.