The challenge for the Israeli prime minister in managing the U.S.-Israeli relationship is immense. A complete rupture with the U.S. is fraught with peril, but quiet acquiescence to Obama’s assault on the Jewish state is untenable as well. It is indicative of how well Bibi has done in navigating through the Obama presidency that, in many respects, Obama is now in retreat. He has essentially repudiated his own NPT statement. He’s now publicly pressing for direct peace process talks, to the chagrin of the Palestinians, who were looking for a gift-wrapped state from Obama with no need for them to ever get in a room with the Israeli prime minister.

On Fox News Sunday, Bibi gave a strong performance and displayed how the balance has shifted in the “peace process”:

NETANYAHU: I don’t think we can make peace with an organization that seeks our destruction. That’s Hamas. But I think we can make peace with the Palestinian Authority. It requires a lot of courage from our side, from me. And it also requires courage from President Mahmoud Abbas, the president of the Palestinian Authority.

It’s going to be a very tough negotiation, but one that I think our peoples are ripe for. Is Hamas going to be a part of it? No. As long as it wants to destroy Israel, it’s not going to be a part of it.

Now, at this point, I could tell you we’ll never negotiate with the Palestinian Authority as long as Hamas is in Gaza. That’s not my position. I think we should get on with it and seek to negotiate peace between Israel and the Palestinian Authority. We’ll have to deal with Hamas later.

WALLACE: But your foreign minister, Avigdor Lieberman, says he sees, quote, “no chance” — no chance — of a Palestinian state by 2012.

NETANYAHU: Well, you know, there are different views. There are people who have different ideas. We’re a democracy. We’re a parliamentary democracy. So people are entitled to have different views. They express them.

But I think that there is no substitute for getting into direct talks right now and seeking to break this logger jam, to actually go ahead and try to negotiate a final peace settlement.

WALLACE: Do you believe there can be a Palestinian state by 2012?

NETANYAHU: I think there can be a solution. It may be implemented over time, because time is an important factor of getting the solution, both in terms of security arrangements and other things that would be difficult if they’re not allowed to take place over time.

So I think the — can we have a negotiated peace? Yes. Can it be implemented by 2012? I think it’s going to take longer than that.

WALLACE: You say it will take courage on your part. Are you willing to put East Jerusalem as a possible capital of the Palestinian state on the table?

NETANYAHU: Well, we have differences of views with the Palestinians. We want a united city. They have their own views. We can — this is one of the issues that will have to be negotiated. But I think the main point is to get on with it.

In short, Bibi is doing everything possible to call the Palestinians’ — and Obama’s — bluff. You want a peace process? Let’s talk!

And on the settlement freeze, Bibi is also holding his ground — at least for now:

WALLACE: Have you and the president resolved the issue of whether you are willing to extend the moratorium on construction of settlements as part of the Palestinians engaging in direct talks?

NETANYAHU: The settlements are an issue that have to be engaged in the final status peace negotiations. That’s always been agreed on, along with other issues.

I made the exceptional, really extraordinary, move of making a freeze on new construction for 10 months — I did that seven months ago — in order to help the Palestinians get in the talks. They haven’t gotten into the talks right now.

Now we’re asked to make an extension of this. Look, I think this is — this is the wrong approach. I think we should eliminate all these preconditions and all these excuses and all those demands for entering into direct talks. We should just get into them.

Again, the message is  — if you want your own state, get in the room. For now it appears that Bibi is in no mood for more concessions. The Palestinians are frantic to find excuses and to avoid pulling back the curtain on the underlying truth that has animated the Palestinian-Israeli conflict for 60 years: the Palestinians lack the will and ability to make peace.

Finally, Bibi was also rather bold on Iran. Here, too, he skillfully threw the Obami’s own words back at them — and made clear that there is not much more time for Israel to wait patiently as the mullahs inch ever closer to membership in the nuclear club:

WALLACE: During your meeting with President Obama, you praised the recent round of sanctions, not just the U.N., but also the additional sanctions that President Obama signed, that the U.S. Congress passed, on Iran.

But recently, the CIA director, Leon Panetta, said this, “Will it deter them” — speaking of the Iranians — “from their ambitions with regards to a nuclear capability? Probably not.” Is Panetta right?

NETANYAHU: Probably. He’s probably right. I can tell you one thing, Iran is closer to developing nuclear weapons today than it was a week ago, or a month ago or a year ago. It’s just moving on with its efforts. And I think there is a great danger to the world, not only to my country but to the United States, to the Middle East, to peace, to all of humanity, from the prospect that such a regime that brutalizes its own people, that sponsors terrorism more than any other regime in the world — that this regime acquires atomic bombs is very, very dangerous.

WALLACE: U.S. officials estimate that Iran perhaps within two years will have a nuclear warhead it can put on a ballistic missile that can strike Israel, Europe, much of the world. Do you have a deadline in your own mind for how long you’re willing to let diplomacy play out?

NETANYAHU: There’s only been one time that Iran actually stopped the program, and that was when it feared U.S. military action. So the — when the president says that he’s determined to prevent Iran from developing nuclear weapons and that all options are on the table, I think that’s the right statement of policy.

You ask what is our policy. Our policy is very simple. The Jewish state was set up to defend Jewish lives, and we always reserve the right to defend ourselves.

WALLACE: Do you have a deadline in your mind for how long you’re willing to let diplomacy play out?

NETANYAHU: Well, I think that we always reserve the right to defend ourselves.

WALLACE: Do you believe a nuclear Iran — a nuclear Iran — can be contained?

NETANYAHU: No. No, I don’t. I think that’s a mistake, and I think people fall into a misconception.

I don’t think you can rely on Iran. I don’t think you can rely on other radicals like the Taliban. They dispatched Al Qaida to bomb New York and Washington. What were they thinking? Were they that stupid? They weren’t stupid. There is an irrationality there, and there is madness in this method. … And we should not allow irrational regimes like Iran to have nuclear weapons. It’s the ultimate terrorist threat today.

WALLACE: But I want to follow your argument. You say that Panetta is probably right that sanctions won’t work. You say flatly that containing a nuclear Iran is impossible. Have you and the president ever discussed the possibility of a military strike?

NETANYAHU: I’m not going to get into the confidential discussions, and I’m not confirming anything of the sort. But I am saying that the president’s position that all options are on the table might actually have the only real effect on Iran if they — if they think it’s true.

Yes, Mr. President, if you could be a wee bit more credible on the use of military force (by the way, how long ago was it that Obama made any reference to the potential use of force? Was it the campaign?) it would — maybe — give the Iranians pause. But if not, Bibi will do what he must do.