Nadim Khoury watches as brown bottles march single file along the conveyor belt from the machines that sterilize them to those that fill them, cap them, and glue on labels reading, "Taybeh Beer. The Finest In The Middle East." Under his large graying moustache, Khoury has a small smile of entrepreneurial pride.

Patriotism brought Khoury and his brother David home to the West Bank village of Taybeh in 1994. They'd lived for years in America, where Khoury earned a business degree from a Greek Orthodox college, then studied brewing at the University of California, Davis. In the euphoria that followed the September 1993 Oslo Accord, they wanted to help develop the economy of what they thought would soon be an independent Palestine. Next to the palatial house their father built to help attract them home, downhill from Taybeh's single traffic circle, they set up their microbrewery, with shining steel tanks for boiling malt barley with hops, fermenting the brew, and aging it. "I made history," Khoury says. "I made the first Palestinian beer." The firm's advertising poster says, "Drink Palestinian," and "Taste the Revolution."

The revolution, though, has acquired a taste more bitter than hops. During the Second Intifada, tourism vanished and with it, beer sales in the hotels of Bethlehem, the West Bank's most popular destination. Israeli roadblocks and checkpoints, intended to keep terrorists from entering Israel or attacking settlers, choked the movement of people and goods. At one point, Khoury says, the brewery was shipping beer through the hills to Ramallah, the nearest city, on donkeys.

Since the uprising sputtered out and Palestinian Prime Minister Salam Fayyad began rebuilding the Palestinian Authority's security forces, Israel has removed some checkpoints. Getting to Taybeh, though, is still a matter of finding an open road. Travelers coming from Nablus in the north encounter a metal gate installed by the Israel Defense Forces (IDF) blocking the turnoff toward the Christian Arab village and forcing a long detour to the south. Getting beer out is even tougher: Exports to Israel must be trucked to a checkpoint on the far side of Jerusalem, put through a cargo scanner, and reloaded onto Israeli trucks -- turning a half-hour journey into a three-hour one. Since the Islamic (and prohibitionist) Hamas movement won the 2006 Palestinian elections, the Khourys have also made a nonalcoholic beer. But they cannot ship it through Israeli checkpoints to Gaza since Hamas took power there in 2007.

In his living room, Khoury points out one window at an Israeli army base, then points out another window at the illegal Israeli settlement outpost of Amonah. "This started with one house," he says. "Now look how many -- 20 or 30 -- and they're expanding daily."

Nonetheless, the brewer is upbeat about Palestinian President Mahmoud Abbas' plan to seek United Nations recognition of Palestine as an independent state in September. What Khoury regarded as the one precondition for statehood has apparently been met: In May, the Hamas regime in Gaza and the Fatah government in Ramallah agreed to reunite. Khoury sees the bid for U.N. recognition as a way out from the political impasse and from the occupation's impediments to business and life. "Israel can't control the whole world," he says. If the United Nations affirms Palestinian independence in the West Bank and Gaza Strip, he believes, Israel must implement the decision.

Entrepreneurial optimism may flavor Khoury's view. The recent Palestinian strategies for independence -- Fayyad's idea that if he builds a state from the bottom up, the world will come to recognize it; Abbas' bid to have the U.N. impose a two-state solution; the Fatah-Hamas reconciliation pact -- are a mix of hope and desperation. Abbas and other moderates in Ramallah see negotiations with Israel as dead and have lost confidence that the Obama administration will revive them. Both Fatah and Hamas fear that the unrest in the Arab world will undermine their rule and have grasped at unity to shore up their legitimacy.

The politicians, too, are looking for a way out.

Ramallah, the de facto capital of the West Bank, bustles like a boomtown. Building cranes tower over the concrete shells of high-rises. New apartment buildings, offices, and hotels stud the main streets. The architectural style is Mideast modern -- oblique angles and rounded facades with multistory panels of blue glass framed in rough-cut yellow stone. The street signs are in Arabic and English -- Edward Said Street, Mother Theresa Street -- and look like they arrived yesterday from the factory. There are too many cars for the meandering narrow streets. A few of the cars are black, new, oversized, and carry the VIP plates of Palestinian Authority (PA) officials. Billboards advertise competing cell-phone carriers. On street corners stand pairs of Palestinian cops in paramilitary olive-drab uniforms, advertisements in themselves for the new atmosphere of order. The sidewalks near downtown Manara Square are packed with shoppers.

In a cafe where I meet a businessman who keeps checking his Blackberry, the women in their 20s at the next table have their heads together over a fuchsia laptop. One has uncovered hair; the other wears an ultramarine hijab that matches her eye shadow. The businessman, 31-year-old Bashar Azzeh, wears a blazer but no tie. He owns a consulting firm and a marketing firm in Ramallah and is a partner in a stone-cutting plant and a shoe factory in the Hebron area.

Young Palestinians -- and the Palestinian population is overwhelmingly young -- "are tired," he says, speaking at a speed that is the opposite of tired. "They see that the Second Intifada did not give them much fruits in the sense of political developments. They are more into a nonviolent approach. They want to be more focused on their careers. They want to get a job, a wife, a house -- the Palestinian dream. And this worked well with the Fayyad approach of building a state," Azzeh says, because the government provides guarantees for consumer loans. "He's giving them loans to build the house, to buy the car, to get married." What's missing, he says, is similar help for young Palestinians who want to start small businesses.

This is part of the puzzle of Fayyad's legacy as prime minister. He has created either a magician's illusion or the concrete foundation of statehood. It depends on whom you ask, which reports you read, what paragraph you highlight within a single study.

Fayyad is another post-Oslo returnee: His family left the West Bank in 1968 for unoccupied Jordan. After earning a doctorate in economics at the University of Texas and working for the International Monetary Fund in Washington, D.C., he came home in 1995 as the IMF's man in the Palestinian Authority. In June 2007, after the PA's Hamas-Fatah unity government collapsed in a brief, brutal civil war and Hamas seized control of Gaza, President Abbas appointed an emergency government in the West Bank. Fayyad became prime minister, both technocrat and autocrat. The Palestinian Parliament stopped convening after the split. Both Abbas' term and Parliament's expired; no elections were held. Fayyad's government remained in place.

By the next year, the Hobbesian anarchy of the West Bank cities during the Intifada days was gone. The PA's security services and police disarmed militias, cracked down on the stolen-car market, and prevented suicide attacks against Israelis -- and used the opportunity to shut down Hamas charities spreading the opposition's message. Palestinian and Israeli security officials resumed close cooperation. Inside the PA's corrupt institutions, Fayyad was also trying to clean house.

In 2009, Fayyad escalated his ambitions. His government, he announced, would turn the PA into a functioning state within two years. With the "peace process" going nowhere -- Benjamin Netanyahu had become Israel's prime minister, and U.S. President Barack Obama was failing to get Netanyahu's assent to a full freeze on settlement building -- Fayyad said his plan was to present Israel with "a fact that cannot be ignored."

Over coffee in Ramallah's old quarter, political scientist Abdel Majid Sweilem speaks professorial Arabic in a measured pace, as if standing at his lectern at Al-Quds University. The Italian- and Bulgarian-trained scholar sees Fayyad as a success. True, there are "chaotic members of Fatah," he says, who resist Fayyad's reforms. But as a result of the government's strategy, he says, "we have liberated ourselves from the Al-Aqsa Intifada," from the "cantons" of terrorism and corruption. "We are now part of international legitimacy, exactly the opposite of Israel," he asserts. Internally, 90 percent of citizens receive health care through government clinics; the rest do so through employers. The PA used to lack all financial accounting. "Now we have a Finance Ministry website that lists all income and expenditures," Sweilem says. International aid has dropped to 40 percent of the operating budget -- an achievement that underlines how desperate the PA's financial situation has been. The development budget still comes entirely from foreign donations.

Like a footnote to that description, a stone plaque at the entrance to the Education Ministry in Ramallah reads, "This building was funded by the Kingdom of Norway -- Year 2002." Upstairs, ministry controller Azzam Abu Baker shows me the twisted scar, thick as a ship's cable, on one of his wrists -- his memento from fighting in the Fatah ranks against the Israeli army in Lebanon three decades ago. Abu Baker arrived in the West Bank in 1994 with Yasser Arafat and his cadre of Palestine Liberation Organization functionaries. Along with his ministry job, the heavy-set, gregarious bureaucrat serves on Fatah's Foreign Affairs Committee, with personal responsibility for Arab matters.

As Abu Baker sees things, Fayyad has damaged the PA education system. For two years, teachers didn't receive their full salaries, he says. Under Fayyad, there's been "intervention of the security services in the appointment of teachers." Besides, the prime minister took away the official cars of top ministry officials, so the Ramallah office, Abu Baker complains, can't maintain contact with regional ones. Meanwhile, "he is pampering the security departments. ... [Fayyad] is more interested in security than in education."

The dispute about official cars may merely testify to the Fatah old guard's resistance to Fayyad's housecleaning. But criticism of the security forces is shared by academic analysts. In a study published this February, Palestinian scholar Yezid Sayigh of King's College in London described how "tenuous civilian control over the security agencies has become" in the PA and wrote that both human-rights groups and the independent media were under attack.

Fayyad did, however, get high grades for state-building in three evaluations submitted to an April conference of donor nations in Brussels. "The PA has continued to strengthen its institutions, delivering public services and promoting reforms that many existing states struggle with," said a World Bank report. The U.N. special coordinator for Middle East Peace noted improved financial transparency and reduced corruption. The IMF reported that "the PA is now able to conduct the sound economic policies expected of a future well-functioning Palestinian state." Fayyad proclaimed that the Palestinians had received a "birth certificate" for statehood.

The World Bank also noted that economic growth in the West Bank and Gaza hit 9.3 percent last year. That helps explain the bustle in Ramallah, but it's only the introduction to the bad news: The growth was "primarily donor -- driven" and "does not ... appear sustainable." The boom is built on foreign gifts and Fayyad's famed fundraising skill.

In theory, the fruits of Fayyad's work -- safer cities, less corrupt ministries, better roads -- should help the productive sector grow. So far, it isn't happening. Entrepreneur Bashar Azzeh lays out the limits to this kind of state-building: The PA administers only 40 percent of the West Bank, which consists of the most densely populated parts and is designated Areas A and B under the Oslo agreements. The land needed for heavy industry is in Area C, still directly governed by Israel. To build a concrete factory, an investor would need Israeli approval for a business that would directly compete with Israeli goods. Instead, Azzeh says, "All our cement comes from Israel."

Starting light industries in Area A or B is possible, Azzeh says, but "let's say you want to [set up] a pharmaceutical company -- you will have problems importing chemicals" defined by Israel as "dual use" -- capable of serving as weapons as well as medicine. If you buy a $5 million machine from China, he says, you'll need Israeli permission for an expert to come show you how to use it. To those difficulties, one can add the need to export via Israel. The bottom line is, in Azzeh's words, "I don't have sovereignty over my borders."

Fayyad's campaign to create a functioning state has collided head-on with the occupation. The U.S. veto in February of a Security Council resolution condemning the Israeli settlements "put the final nail in the coffin of the Fayyad plan," says Mouin Rabbani, an Amman-based Palestinian analyst. In Ramallah, the veto confirmed the view that Washington is part of the problem, not the solution. It left little hope that the U.S. would recognize a state established without Israel's agreement. That conclusion helps explain Abbas' bid for U.N. recognition and Fatah's unity agreement with Hamas.

If Fayyad hoped to build a state from the bottom-up, Abbas has always sought to do so from the top-down, through international negotiations, says Menachem Klein of Bar-Ilan University, a top Israeli scholar of Palestinian politics. Abbas saw the Second Intifada as a disaster for the Palestinians, he says. Moreover, Klein stresses, "Abbas very strongly opposes nonviolent civil resistance," which he sees as inevitably leading to violence.

Since succeeding Arafat as PA president in 2005, Abbas has tried to negotiate independence. Talks between him and Israeli Prime Minister Ehud Olmert came close to producing an agreement in 2008. As Israeli Deputy Prime Minister Dan Meridor describes those talks, Olmert finally made "an offer you cannot refuse." Israel would give up all but 4 percent of the West Bank, for which it would pay with an equal amount of Israeli territory -- so media reports say -- and Jerusalem's holy sites would be put under international rule. Abbas "disappeared ever since" -- perhaps unwilling to sign an end to all demands or unable to admit that the PLO dream of regaining all of Palestine had failed or afraid to confront Hamas, Meridor says in his small office, two floors below Netanyahu's in Jerusalem. Meridor is the most moderate figure in Netanyahu's party, insistent that Israel should seek a two-state agreement, unhappily unsure that the other side is willing.

In Ramallah, less than 10 miles north as the helicopter flies and on the other side of the vast divide between Israeli and Palestinian histories of the same events, Palestinian government spokesperson Ghassan Khatib gives a different version. Khatib's gray moustache is as carefully trimmed as his blue tie is perfectly knotted. He is a member of the People's Party, successor to the Palestinian Communist Party, known in Palestinian politics for being the faction that never had an armed wing. His expression tends toward the slightly quizzical, as if he is still not sure how he found himself in the midst of this mad conflict. Olmert made proposals, he says, and the Palestinian side responded. But "the process was interrupted by the absence of Olmert," a delicate way of saying that the Israeli leader left his post under multiple corruption allegations. When Netanyahu took office, "the new government refused to continue on the basis of what had been agreed," Khatib asserts. The meaning of these two equally incomplete versions is that both sides are sure an agreement had been within grasp and that each, as usual, is convinced that the other evaded the chance.

Nonetheless, Khatib says, the Palestinians kept negotiating -- -through the Americans, then directly -- until Netanyahu refused to renew his partial freeze on settlement-building last September. "You cannot negotiate the future of the territory with a party that is busy unilaterally determining its future by force," he argues. Khatib has been involved in peace talks for 20 years. "The only concrete thing" to which the Oslo process has led, he laments, is "doubling the size of the settlements." President Obama "made a promising start" at pushing for a peace agreement, then disappointed Palestinian expectations. Since bilateral negotiations have failed, he says, "we will go to the United Nations" in September "and ask the international community to take ... responsibility" for ending the occupation.

This is a fairly wild gamble. To accept Palestine as a U.N. member or approve any U.N. action, a Security Council vote is needed -- and an American veto is virtually certain. A General Assembly vote is declarative and nonbinding, though an oft-overlooked 1950 precedent from the Korean War allows the General Assembly to pass a resolution recommending more strongly that member states take collective action, including imposing sanctions on Israel.

In the most likely case -- a large General Assembly majority for statehood -- no one knows what would happen the next day in the West Bank. Life might continue, with Israeli and Palestinian security officials still meeting and shoppers still crowding downtown Ramallah. Conceivably, Israel could crack down on the PA with arrests and renewed roadblocks. Conceivably, a Palestinian public facing broken hopes could go to the streets against Israel or its own leadership, peacefully or violently.

Internationally, Israel could find itself significantly more isolated. After a vote recognizing Palestine as defined by the pre-1967 West Bank and Gaza borders, Sweilem argues, peace negotiations "will no longer be on the size of the state but on the mechanism for establishing it."

"There will be a political cost for the United States" if it casts a veto, Khatib says. "They have to explain how they can support the calls for freedom in the rest of the world and deny this right to the Palestinians." The U.S. veto in February embarrassingly contradicted America's own stance against settlements. A veto on statehood would be another embarrassment, given America's declared policy of supporting a two-state solution.

U.S. discomfort would also increase if major European countries vote with the Palestinians. Trying to line up the Europeans' votes, Netanyahu and Abbas have become rival traveling salesmen in European capitals. Since taking office, Netanyahu has treated Abbas as a competitor for Western sympathy, not as a peace partner. Abbas is returning the favor. One reading of his strategy is that he is playing chicken with Obama: Do something, present your plan, before I upset things. Another reading is that he has given up on Obama.

The latter reading fits with his decision to agree to reconciliation with Hamas. The accord is supposed to lead to a unity government made up of technocrats and to elections in a year. American disquiet about an alliance with the hard-line Islamists has become less relevant. For Abbas, criticism that he represented only half the Palestinians is more important.

Unity "will help him ... go to the U.N., because [otherwise] everyone will say, 'How can we recognize you when you are not able to unite?'" says Dr. Ayman Daraghmeh, an independent Islamist member of the Palestinian Parliament. Daraghmeh, a biochemist educated at the University of Delhi, shares an office with Hamas legislators in a Ramallah building called the Mecca Center. "Even Netanyahu told him, as I have heard from Abbas, 'With whom should I negotiate, you or Hamas? You are not united,'" Daraghmeh says. "And when Abbas [agreed] to unity, [Netanyahu] warned him, 'Either peace with Israel or relations with Hamas.'"

The Arab Spring provided even more of a push for a unity agreement. The consensus in Ramallah, across political lines, is that post-revolutionary Egypt has become a less reliable patron for Fatah and that Damascus is no longer a friendly host for Hamas and its headquarters. "The international Islamic Brotherhood and the local Islamic Brotherhood in Syria support the revolution" against Syrian leader Bashar al-Assad, explains Abu Baker, Fatah's Arab affairs expert. Since Hamas "is an offshoot of the Islamic Brotherhood, it cannot stay in Damascus," Abu Baker says. "It cannot put day and night together."

In both Gaza and the West Bank, the educated, dissatisfied young made the factional split between Hamas and Fatah leaders their first target for political change. "The people demand the end of division," youth chanted in Ramallah, Gaza, and other cities, in Facebook-publicized demonstrations beginning on March 15. Bashar Azzeh helped organize the rallies but insists that he's not a leader -- indeed, that the March 15 Movement has "Facebook, Twitter, e-mails, and meetings -- not leaders."

"We're overcoming the issue of leadership," he says, in a clear dig at the graying apparatchiks and the established Palestinian factions.

The protests appeared hopelessly small. Just 2,000 people turned out in Ramallah on March 15. In Bethlehem two days later, I found only a few dozen people gathered at a tent in Manger Square decorated with a map showing Palestine broken in two. Yet the demonstrations frightened the factional leaders. "Everyone fears the future, and the movements of the street," Daraghmeh says. "What happened in Cairo was a tsunami."

The unity agreement signed in May is only a rough framework. No one knows if it will survive dickering over the makeup of the new government or how that government will deal with separate security services, Hamas-run in Gaza and Fatah-run in the West Bank. Khatib says Hamas has accepted the PLO position of honoring signed agreements with Israel. That, too, remains to be tested.

For the March 15 movement, Azzeh underlines, unity is only a means toward the real goal: ending the occupation. "We still live in cantons. We don't have a currency," he says. "We need our own borders." Reconciliation is just part of the larger gamble.

There is another West Bank. Its Jewish residents call it Judea and Samaria or Yesha, an acronym that spells the Hebrew word for "redemption." Avi Roe lives and works there, as chair of the Mateh Binyamin Region Council, the local government of a swath of settlements north of Jerusalem. Next to the council's headquarters, in the settlement of Psagot, new apartment buildings are going up. The residents will have an excellent view of Ramallah below them.

Maps and aerial photos of settlements cover the walls of Roe's office. With a laser pointer's red dot, he indicates communities in his realm where construction is underway. Over 800 units are being built in Mateh Binyamin, he says. Given the size of settler families, that could bring a 10 percent increase in the council's population of 53,000. Building apartments, he explains, represents a sacrifice of suburban "quality of life" in order to bring more people, in order to dig in.

If the Palestinians unilaterally declare independence, Roe says, Israel should respond by unilaterally "declaring the annexation of Judea and Samaria to Israel." Arab residents, he says, could become citizens if "they prove their loyalty to the state and its values" -- a coded way of saying they'd have to swear fealty to Israel as a Jewish state. Roe believes it's a mistake to worry about "what the U.N. says." Not long ago, he explains, Jews "tried to integrate into other countries, especially in Europe, and we got it during the Holocaust, because the gentiles wouldn't accept us." From this, he concludes that Jews should look out for themselves, without concern for international approval.

The settlers are a volatile part of Netanyahu's constituency. They wield influence -- apparently more than the moderate Meridor does -- but do not directly set government policy. Vice Premier Moshe Ya'alon, Netanyahu's No. 2 and a former military chief of staff, may provide a better indication of official thinking.

With his receding ring of hair, heavy cheeks, and glasses, Ya'alon looks like a bureaucratic everyman. The heavy thump of his hand on his desk punctuating his sentences better fits an ex-general's image. A General Assembly vote for Palestinian statehood under standard rules, he says, would be "unpleasant, not terrible." But a stronger recommendation, following the 1950 precedent, could create a "failed, hostile entity" in the West Bank, another "Hamastan" like the one in Gaza, Ya'alon asserts. Israel's diplomatic efforts in Europe are aimed at preventing this.

He puts much less confidence in diplomacy with the Palestinians. The lesson of the 18 years since Oslo, Ya'alon says, is "that we don't have a partner willing to reach an end to the conflict." So before negotiating final-status issues, he says, the Netanyahu government wants answers from the Palestinians on whether they are willing to recognize Israel "as the nation-state of the Jewish people," whether they'll agree to an end to all claims against Israel, and whether they will meet Israel's security needs. Those needs, he indicates, include Israeli control of the border between the West Bank and Jordan. After Israel left Gaza, he notes, Iranian arms began pouring in across the border from Egypt. In short, what appears from Ya'alon's office at the Defense Ministry as the most pragmatic precondition for Palestinian independence means denying what Palestinians see as a basic quality of statehood: sovereignty over their own borders.

Ya'alon rejects Roe's idea of annexing the West Bank. "We have no interest in ruling the Palestinians," he says. "We have no interest in making them Israeli citizens. ... We want to separate from them." But if the Palestinians act unilaterally, "it will make us think about unilateral steps." The Oslo accord, Ya'alon says, would be "irrelevant," as would any commitment to allow Palestinians to continue working in Israel. "We provide electricity and water to the Palestinians," he says. "If we're facing a hostile entity, we'll have to weigh steps ... that wouldn't allow the viability of that entity."

Both sides can play chicken, Ya'alon is saying. And as September approaches, both sides can gamble on presenting their case to foreign powers, rather than talking to each other.

In the brewery next to his house, Nadim Khoury is installing six new tanks that will allow him to double his current production of 160,000 gallons of beer a year.

"I'm very optimistic," he tells me. "I mean, can you tell me how many countries are still occupied? It can't be forever." His Greek-born sister-in-law, Maria, invites me to return for Taybeh's Oktoberfest. That's on the far side of September. They are betting on there being an open road in, on there being a way out.