It was a call to arms heard throughout the Mideast last week. Even as Prime Minister Ehud Barak and Palestinian leader Yasir Arafat–two former peace partners, now adversaries–planned a trip to Egypt for a ceasefire summit with Egyptian President Hosni Mubarak and President Bill Clinton, thousands in the streets of Arab capitals shouted their support for the Palestinians against Israel: “We will sacrifice our blood and our soul for Palestine!” Satellite-television stations in disparate countries like Abu Dhabi and Syria jointly broadcast special programming on the Palestinian struggle. The United States, meanwhile, was demonized as Israel’s evil big brother, rather than the “honest peace broker” Clinton had tried so hard to become. The president’s efforts to stay evenhanded–which included a controversial decision to abstain from, rather than veto, an Arab-sponsored U.N. resolution condemning Israel–didn’t do anything to prevent the deadly attack on the USS Cole in Yemen, apparently by terrorists exploiting the rising wave of anti-Americanism. All in all, the martial mood seemed a throwback to earlier generations, when major Arab nations like Egypt and Syria, bolstered by Soviet aid, sought to wipe out Israel in the late ’60s and ’70s.

The renewed Arab violence provoked a new wave of retaliation from Israel. Israelis, who only months ago were supporting peace with Arafat in large majorities, also felt themselves thrust back to the temper of an earlier time. Gangs of Jews, enraged by the lynching of two Israeli soldiers in Ramallah, rampaged anew through Arab towns and neighborhoods last week, attacking any Arabs they could get their hands on. Meanwhile the right-wing Israeli politician who helped provoke this crisis with a visit to Muslim holy sites in Jerusalem, Likud leader Ariel Sharon, was on the verge of joining Barak in a “national emergency government.” “The voices of moderation have been silenced,” said Saeb Erekat, Arafat’s Western-educated chief peace negotiator. “It’s going to be a killing field out there. The worst has not yet come.”

One thing is certain: what was a rather narrow struggle between Palestinians and Israelis a few weeks ago had, by this week, rippled far beyond. In commodity pits throughout the United States and Europe, traders who feared a 1970s-style Arab embargo sent oil prices soaring for a time last week. Arab leaders readied for a Pan-Arab summit on Oct. 21 in Egypt. One of those expected to attend–a suddenly less isolated Saddam Hussein–vowed to rain destruction on Israel if given a staging area in one of the other Arab nations. The Iraqi leader also moved thousands of troops closer to the Jordan border.

But the persistent rumors of war in the face of flagging efforts for peace seemed to miss a central point. This is the year 2000, not 1973 or 1967. The Middle East is a very different place than it was a generation ago. Ten years after the gulf war, Saddam’s military is still weak (the CIA said his troop shifts were feeble); the Arabs’ old friend, the Soviet Union, is long gone; Syria and Egypt are impoverished nations yearning to be part of the globalized economy, not preparing to invade Israel, and the United States and Israel are both vastly more powerful, militarily and economically, than they were then. It’s also highly unlikely that friendlier Arab nations like Egypt and Saudi Arabia–both indebted to Washington for aid or military support–will sign on to any oil embargo against the West. Indeed, late last week Egypt and Saudi Arabia, fearing they may be drawn into a hard-line anti-West policy, sought to postpone the Oct. 21 Arab summit, U.S. officials said.

The big question going forward is whether Yasir Arafat fully understands the difference between now and a generation ago, when he began his career as a guerrilla agitating against the Israelis he believed had stolen his homeland. Indeed, the central mystery of the past weeks is what the Palestinian leader is really planning. Many Mideast observers believe that, if Sharon’s visit touched off the violent protests by Palestinians, Arafat has quietly encouraged them. The reason? He may believe that last summer’s Camp David talks forced him into it. Fearing a burst of outrage from the Arab world, he thought he couldn’t agree to a compromise plan put forward by Barak and Clinton. This would have forced him to give up forever some of his claims to East Jerusalem and some West Bank land, among other things. But neither could Arafat gain any support in the international community for a unilateral declaration of statehood after Camp David failed. So instead, says Robert Satloff of Washington’s Near East Institute, “he’s reshuffled the deck.” He may be calculating that the world will support unilateral statehood born in confrontation in ways it never did for negotiation. And that, even if he gets less land now than he would have at the peace table, the Arabs and his own people won’t accuse him of selling out.

That is why Barak’s aides fear that Arafat is looking to create a state in “blood and fire,” as one put it. By edging toward war now, and bringing on U.N. and European intervention to stop it, he might prevent the Israelis from carrying out threats to annex territory and seal off his strongholds if he proclaims independence without their permission.

But Palestinian interests, too, are very different from a generation ago. If once Arafat was an underground guerrilla who scurried from hideout to hideout in Beirut, Tripoli and Tunis, today he lives like a pasha, afloat in billions in Western aid funneled to his Palestinian Authority, traveling freely and in style around the world. Before the peace broke down, his top lieutenants feasted on shrimp and French wine in trendy Tel Aviv restaurants. Some forged highly lucrative partnerships with Israeli businessmen. They flew their own flag over their homeland, issued postage stamps and personally whizzed through checkpoints and border crossings with their Israeli-issued VIP passes (even as their subjects were herded in and out of Gaza like so many cattle). But any time it wants, Israel can still “choke the Palestinians economically,” notes a senior Israeli official, by cutting off money flows, food, electricity and water to and from Gaza and the West Bank.

The Israelis can also obliterate Arafat’s fledgling militia if they so choose. Israeli military commanders say if Arafat is planning to wage a low-intensity war against Israel, they are going to stop him with high-intensity retaliation. The carefully calibrated rocket strikes around Arafat’s headquarters in Gaza and the destruction of the police building in Ramallah last week–retaliation for the lynchings–were “only the beginning,” a senior Israeli Army official told NEWSWEEK. “We have maps detailing every nook and cranny of the PA. We know every single window on each of the PA’s headquarters throughout Gaza and the West Bank. We’re not going to blindly hit civilians; we’re going to hit PA military targets so precisely, so acutely, they won’t know where it’s coming from.”

The Palestinian leadership, in other words, has a vested interest in a peace process that has gone on for seven years–whether the extremists, and Arafat himself, realize it or not. If Arafat believes he cannot afford to make peace on the terms Clinton and Barak set for him at Camp David, then neither can he afford a real war. He is walking along a razor’s edge that may well fatally wound him. That is why Arafat’s reluctance to call off the violence is so dangerous and, observers believe, possibly self-destructive. He may be consolidating his support among the Palestinians and Arabs, but Arafat may have permanently alienated the very partners he will need to make his dreams of statehood a reality: Israel and the United States. “Arafat is flirting with disaster,” said one angry senior U.S. official last Friday, following a tense, two-hour strategy session at the White House. “He’s jerking us around and overplaying his hand.” Clinton said the planned get-together in Cairo this week, which also was to include U.N. Secretary-General Kofi Annan, was intended to “break the cycle of violence.” But a senior aide conceded that, given Arafat’s larger strategy, the gathering wasn’t “anything other than the tiniest ray of hope.”

Clinton is said to have grown furious with the Palestinian leader’s balkiness. And he’s making his ire known: he instructed his U.N. ambassador, Richard Holbrooke, to veto any new U.N. resolution on the conflict. Holbrooke told NEWSWEEK: “If the [Palestinians] try to take us back to the future, to the era of Zionism-as-racism, they will weaken the United Nations, weaken their own effort and seriously damage the progress they have made.”

Just how risky Arafat’s recent strategy has been became clear last week during the lynchings in Ramallah, an affluent suburb that has benefited from peace and economic integration with Israeli Jerusalem. Two Israeli soldiers were captured nearby, then lynched by a howling mob that burst into the Palestinian Authority police station. Some evidence suggests that Arafat’s police did try to stop the attack, but were overcome by the crowd. The incident raised questions about how much control Arafat really has over the forces he has unleashed–and therefore whether he’s of much use any longer as a peace partner.

For now, Arafat seems to be playing with a losing hand. “I don’t see how he wins this,” says Richard Haass of the Brookings Institution. “Yes, he survives, but to what purpose? He doesn’t have anything to show for the Palestinians.” Arafat’s negotiator, Erekat, puts it another way. He tells of the fears of his 9-year-old son Mohammed as the Israeli bombs struck Gaza last week and the boy clung to him inside their darkened house. “I told him it’s not going to hit us, don’t be scared,” Erekat remembers. “He was extremely scared. I was scared.” And then his son cried: “Is this the peace that you are bringing us?”