Political leaders on both sides are warning that Palestinian anger is reaching boiling point over the Israeli drive to build thousands of new homes in Arab East Jerusalem and the West Bank, conquered by Israel in the 1967 Middle East war.
Israel's right-wing Prime Minister Binyamin Netanyahu announced the plan in December, soon after the United Nations overwhelmingly approved giving the Palestinians the status of non-member state.
That largely symbolic vote fell far short of the Palestinians' drive to get U.N. recognition as an independent state but Netanyahu and many Israelis saw it as a grave threat to the Jewish state.
Netanyahu's settlements expansion plan triggered a storm of international condemnation because if it goes ahead -- and there seems little doubt that's the case -- it will deliver a final blow to the two-state peace process that has been bleeding to death for several years over Netanyahu's refusal to abandon the West Bank.
"We're on the verge of a third intifada," former Israeli Prime Minister Ehud Olmert warned last week.
"I don't know what will spark the great conflagration."
But he voiced concern the Palestinian Authority's 76,000-strong security forces, largely U.S.-trained but heavily outgunned by Israel, will go rogue and attack the Jewish state.
"They're deeply frustrated and feel that their leaders, who they believe are adopting policies of appeasement, will eventually forsake them," Olmert said.
"If we continue to refuse peace, we'll be dealt a painful blow that will affect all aspects of our lives."
The Palestinians launched intifadas in 1987-93 and 2000-03, triggering suicide bombings in Israel's cities that took a fearsome toll. Neither came anywhere near ending the occupation, even at a cost of several thousand dead and wounded Palestinians.
But if a third intifada does erupt, it will be conducted amid a very different set of circumstances than the previous rebellions and could conceivably produce a different outcome amid Israel's growing isolation.
The Arab world is in turmoil as citizens from the Atlantic Ocean to the Indian Ocean have risen up against authoritarian rulers. They're demanding economic and political reforms and in some cases the end of the regimes that have dominated their lives for decades.
Israel has been alarmed at how Islamists have been empowered, particularly in neighboring Egypt following the 2011 downfall of President Hosni Mubarak.
He was a staunch supporter of his country's historic 1979 U.S.-brokered peace treaty with Israel.
The Hashemite monarchy in Jordan, which signed a peace treaty in 1994, is in deep trouble, while the civil war raging in Syria could topple the Damascus regime, which has favored non-aggression with Israel since the 1973 war, and propel Islamists into power.
"The enemy is waging a fierce onslaught on Jerusalem and accelerating plans to Judaize the city geographically and demographically," he stated.
That followed an eight-day battle between Hamas and Israel in November that left 160 Palestinians, mainly civilians, dead.
If completed, Netanyahu's settlement expansion plan would totally isolate Palestinian population centers in the West Bank and bring down the Palestinian Authority and its president, Mahmoud Abbas, who has long sought to negotiate with Israel.
Hamas has long been infiltrating the Fatah-held region seeking to bring down Abbas' administration.
Israel cannot allow that to happen because holding the West Bank would expose the Jewish state's main cities, Jerusalem and Tel Aviv, to the full weight of missile bombardment that Hamas cannot yet achieve from more-distant Gaza.
Hamas infiltrators have been the main target of Israeli security forces in recent days, fueling Palestinian outrage.
Observers believe that with frequent clashes between hard-line settlers and Palestinians in the West Bank, it would take little to trigger wider violence that could ignite a new uprising.