It is not entirely clear, but it seems that Netanyahu (Israeli Prime Minister) is playing hardball with Obama. Netanyahu is pressing an Iran first policy. Nothing of any substance will happen with the Palestinian 'issue' (state, not state...) until Iran has been dealt with.
Obama's actions and statements show that he is more interested in dealing with the Palestinians then with Iran. Israel on the other hand, clearly are more concerned about Iran then the Palestinians. Yes, terrorism is a problem for Israel, but nothing even approaching the problems that a nuclear Iran would create.
Israel is in a win-win here. If they feel that dealing with the Palestinians is in their best interest nothing prevents them from doing so. If they feel it would be detrimental to their security then they can just point to the policy when pressured by Obama. As far as Iran goes, this policy does not prevent Israel from taking militarily action. It may also prod Obama into taking action against Iran that he may not want to.
Assuming this is Netanyahu's policy, he will stick with it, and Obama wants to deal with the Palestinians and not Iran, Obama would be stuck. His three choices then would be to change his own policy objectives and deal with Iran first, forget about his goals with the Palestinians, or undermine Netanyahu. Should he try to undermine Netanyahu and fail, or possibly even just the attempt, Obama risks alienating Israel. Alienating Israel and driving them to seek out another ally could be disastrous for the United States. As I said in Berman Post: Obama Approved a Large Turkish Arms Sale to Lebanon;
"If relations strain enough between the United States and Israel enough, they might start ally shopping. It would not surprise me in the least if both China and India have fueled planes warmed up on the runway with five billion dollars in the hold ready to race each other to Tel Aviv. It is hard to come up with a worse two country combination from the United State's dominance perspective then Israeli technology with Chinese or Indian manpower."
More at http://www.washingtonpost.com/wp-dyn/content/article/2009/04/21/AR2009042103998.html and http://www.powerlineblog.com/archives/2009/04/023390.php.
This may not be Israel's new policy though. Danny Ayalon (Israel's Deputy Foreign Minister) denied the report. Ayalon said that they would deal with each issue as if the other issue did not exist. That the two issues were not linked in any way.
More at http://www.jpost.com/servlet/Satellite?cid=1239710756583&pagename=JPost%2FJPArticle%2FPrinter.
That was not the end of the story. When asked about the policy, Hillary Clinton seemed to confirm that the original story was true.
More at http://hotair.com/archives/2009/04/27/clinton-cluelessness-confirmed and http://www.washingtonpost.com/wp-dyn/content/article/2009/04/23/AR2009042304060.html.
We will have to wait and see what happens to know if the first report was true and if Israel will stick with it.