World Watch

It is often a sign that something is shifting in Israeli politics when Shimon Peres is in government, and the return to power by the veteran Labour leader is evidence that a breakthrough in the peace process may - just - be possible in 2005. By joining Ariel Sharon's Likud-led coalition as deputy prime minister, Peres is showing that the majority of Israelis back the plan to withdraw from the Gaza Strip, remove its settlers and restart negotiations with the Palestinians.

Peres's move illustrates the fact that four bloody years of armed intifada have destroyed the Israeli left but underlined the need to end the conflict. Yasser Arafat's death and replacement by the pragmatic Mahmoud Abbas is one reason things could improve - not because Abbas will bend on the tough issues of borders, settlements and Jerusalem, but because he is likely to curb violence, embrace reform and win international backing to force Israel to accept a fair deal. Another reason is Sharon's conversion to the idea that Palestinians need their own state - though exactly what it should consist of remains, crucially, to be agreed.

Peres, now an impressively sharp 81, has never been popular (perhaps because he has never won an election), and many Israelis agree with Yitzhak Rabin's description of him as an "indefatigable schemer". But he ignores the sneers to stick optimistically to his hopes for a "new Middle East" in which globalisation and demography will drive political change.

Talking to the Labour leader in his Tel Aviv office is to be reminded of his role in key episodes in Israeli history: the nuclear weapons he secretly acquired in the 1960s, the Entebbe rescue, the disastrous Grapes of Wrath operation in Lebanon when he was prime minister after Rabin's assassination. Mementoes include the citation for the Nobel peace prize he won - with Rabin and Arafat - for the Oslo agreement in 1993. His memoirs are entitled Battling for Peace. With his swept-back white hair he looks like David Ben-Gurion, his mentor and Israel's first prime minister.

Peres will back Sharon in insisting that Abbas cracks down on Hamas, but he will push for confidence-building measures and negotiations without waiting for a reformed Palestinian Authority. After all, Israel made peace with Egypt and Jordan without insisting that Anwar Sadat or King Hussein were card-carrying democrats. But he will be cautious too, burned by the collapse of the Oslo process. "If you jump too high, you can fall and break your neck," he warns.

It is too often forgotten that Labour bears a grave responsibility for the deadly impasse of recent years. Jewish settlement in the West Bank - the dragons' teeth of the conflict - began under its rule after the 1967 war. But the party has long accepted the formula of land for peace. Now there is a sense that time is running out, amid worried talk about the "South-Africanisation" of Israel and its transformation into a pariah state if a durable settlement is not reached soon. Palestinians, who live with the routine degradation of occupation, have good reason to be sceptical about the future and fear an imposed "solution" of disconnected cantons or Bantustans, of Gaza first - and last.

But there are signs that the silent majority recognise that a just agreement is possible. Hani al-Hassan, an Arafat loyalist and one of the PLO's founding fathers, believes important lessons have been learned: "We have to make peace with all Israelis, left, right and centre," he says, "not like at Oslo when it was just with the Labour party." Perhaps the hour of the wise old men has finally come.