But Iraq has indefinitely postponed a meeting with Annan that was due to take place in New York this week to discuss inspections. For the moment, at least, Baghdad no longer believes the threat of a U.S.-led war to be credible. “They’ve outmaneuvered the Americans for now, so they’re not going to play the inspection card,” a senior U.N. diplomat told NEWSWEEK. “They will save that until they believe that the Americans can be taken seriously.”

The current Israeli-Arab tensions are a public relations windfall for Saddam, who wants to milk the conflict for all its blood and turmoil. The entire Arab world has pushed the issue of a U.S.-led war onto the backburner. Even Britain, America’s staunchest ally in the war on terror, is getting queasy over the idea of invasion. What better strategy for Saddam than to sit back and watch the carnage in Israel and the West Bank, knowing that until the conflict simmers down the U.S. is helpless to act against him? “[The Iraqis] don’t want to dilute the publicity value they’re getting from events in the Middle East by focusing on their problem,” one senior U.N. diplomat told NEWSWEEK.

Israel’s continued military occupation of the West Bank has allowed Baghdad to wrap itself in an impenetrable blanket of pan-Arab unity. Even Iraq’s archenemy Kuwait signed an unprecedented friendship pact at the Arab League conference last month in Beirut. Saddam has provided up to $25,000 each to the families of Palestinian suicide bombers-a cynical act that happens to play well in the Arab street. Last week, Iraq announced that it was suspending oil production in retaliation for the Israeli occupation of Palestinian areas. And while most Arab governments may see through these ploys, they also fear a violent and destabilizing backlash in their own countries if they support an invasion. “[Saddam] is probably more successful now than he has been in the last 10 years,” says Frank Anderson, former chief of the CIA’s Near East Division. “He’s on the verge of breaking the [U.S.-led] coalition.”

For its part, the Bush administration has its own Iraq gambit. Washington believes that it can disentangle itself from Arab-Israeli tensions to pursue the ultimate aim of confronting Saddam. Bush has demanded unrestricted inspections, with the expectation that Baghdad will refuse-thereby providing the rationale for a military campaign. At the same time, the White House wants to adjust economic sanctions to focus only on imports that could be used to make weapons of mass destruction. Once Iraq no longer can claim that sanctions are killing its children, “we can look the Arab world in the eye and say it’s not about the people of Iraq, but it’s about the government,” says one U.S. official.

That strategy can work only if U.S. allies are fundamentally comfortable with exercising a military option. And right now, even traditional U.S. allies are voicing increased concern that now is not the time for an armed confrontation with Baghdad. “There is a wariness of heavy-handed action in the region [on the part of the US,]” a British diplomat told NEWSWEEK recently. “If you are dealing with a security threat, there is no point dealing with one just to create another. You have to deal with the practicalities of the actions you are going to take.”

Within the U.S. military there are disagreements as to what kind of action, if any, the U.S. should take against Iraq. While several defense policy advisers strongly believe that the Iraq option should be pursued immediately, others are not so sure. “There are a lot of advisers who are trying to convince themselves that the war on terror, the Palestinian situation and Iraq are not related,” one senior Defense Department official told NEWSWEEK. “There are others of us who are a lot smarter than that.”

One line of thinking in the Defense Department is that not only would a war on Iraq prove to be destabilizing to other Arab regimes, but it would also make Arab governments unlikely to cooperate with the U.S. in providing the necessary intelligence to effectively fight the larger war on terror. “A lot of water has to flow over the dam before we can deal with [the Iraq] problem,” says the Defense official. Nevertheless, Iraq cannot hold out against inspections forever. Saddam “may be enjoying the public relations now,” says the British diplomat. “But he must recognize that the pressure will still be on.” And that sooner or later, the U.S. will turn the spotlight back to Baghdad.