ith Yasir Arafat ending his monthlong confinement in Ramallah by calling Israeli troops Nazis and Ariel Sharon coming under pressure from his Likud Party to reject a Palestinian state, peace is not at hand in the Middle East. Yet the freeing of Mr. Arafat, the withdrawal of most Israeli forces from Palestinian cities, the disruption of the Palestinian terror campaign and the deepening American-Saudi commitment to a peace offensive all indicate that this is a pivotal moment.

Few things are as important as preventing new Palestinian terrorist attacks on Israeli civilians. Arab leaders have an obligation to press the Palestinians on this, as the new Saudi-American plan envisions. The radical Islamic group Hamas has proclaimed its intention to launch terror strikes, but Palestinian security officials can and must seek to interrupt those plans. Mr. Arafat has not helped matters with his belligerent statements, but his freedom allows those around him to take on some of the real work and perhaps eventually ease him into more of a figurehead position. Many Palestinian leaders favor such a change but were unable to do anything about it while he remained confined.

On the Israeli side, Mr. Sharon says he will bring new ideas with him to Washington this weekend. This is indeed the time for bold Israeli diplomatic initiatives. Israel had a right to pursue terrorists, though we disagreed with the scale of its military operation. Congress did no favor to peacemaking yesterday by issuing a reflexive endorsement of the Israeli offensive. Now Israel must act on what Mr. Sharon has said: there can be no military solution to this conflict. Preparations should begin immediately for a new relationship with the Palestinians. An international peace conference proposed for this summer could help.

Each side owes itself a frank assessment. After 19 months of shooting, suicide bombing and pathological promotion among its youth of "martyrdom," the Palestinian nation is hurting more than ever and appears no closer to realizing its legitimate dream of free, independent statehood. Israel, having destroyed large chunks of the Palestinian administrative infrastructure, still finds itself in a toxic occupation that guarantees its citizens no personal safety and its young men and women more army service defending ill-advised settlements in the West Bank and Gaza Strip.

Never have majorities among both peoples agreed more on what the future should be — two states side by side. Yet large majorities in both camps also favor the most aggressive short-term tactics — large-scale military invasion on the part of Israelis, suicide bombings by Palestinians. Israeli and Palestinian leaders have ridden the short-term anger to renewed popularity. But failure to understand the long-term trend will mean not only political disfavor but years more of unnecessary suffering. Leadership means more than listening to the approving roar of the crowd. In this case, it means looking beyond the rage of your own people.