After 15 days of intense discussions, the Middle East peace talks at Camp David have ended in failure. Israeli Prime Minister Ehud Barak and Palestinian leader Yasser Arafat could not agree on the final status of the city of Jerusalem, and broke off negotiations. Both men return home weakened. The failure to reach agreement is a blow to the peace process, but it need not be a mortal one. Progress has been made. Momentum will slow, but it must not be lost.

The gap that proved unbridgeable was Jerusalem. The city has holy sites of three religions — Christianity, Islam and Judaism — and both Israelis and Palestinians claim it as their capital. Jerusalem is home to some 200,000 Palestinians, about 30 percent of the city’s total population. Most of them live in East Jerusalem, territory seized by Israel in the Six Day War, but there are Jewish settlements in that part of the city as well. As a result, the intermingling of Israelis and Palestinians means no simple boundary divides the two groups.

Mr. Barak went into the negotiations claiming, as had every one of his predecessors, that Israel would maintain sovereignty over all of Jerusalem. Mr. Arafat demanded East Jerusalem as the capital of the Palestinian state that would one day come into existence.

In a historic shift, Mr. Barak offered the Palestinians control over Arab neighborhoods in East Jerusalem in exchange for the annexation of several Jewish settlements on the West Bank. Mr. Arafat refused, and insisted on full Palestinian sovereignty over all of East Jerusalem. There the talks foundered.

Both sides promised to continue discussions early next month when the chief U.S. peace envoy visits the Middle East. It is unclear where the talks will resume. Mr. Barak has declared that his offer on Jerusalem was “null and void” because it was not accepted. While the specifics of the Israeli offer may be rescinded, a critical step has been taken. Israel has broken a taboo and signaled a willingness to deal on Jerusalem.

This new found realism is to be applauded. Jerusalem has never been the united and undivided city that Israelis have claimed it to be. But Mr. Barak’s willingness to compromise will only harden the hawks in Israel. Even more moderate Israelis have been dismayed by Mr. Arafat’s unwillingness to reciprocate the Israeli leader’s concession. They now see their prime minister as having given away too much and received nothing in return. His coalition is crumbling, and there are signs that his government might not survive. The Labor Party is prepared to do everything it can to force new elections. Mr. Barak says that his commitment to peace is still strong, but the Israeli people may not be as determined after the breakdown of the talks.

Mr. Arafat returns home strengthened in the eyes of the Arab world. He refused to budge on his long-term demand for control over all of East Jerusalem. Unfortunately, that may have cost him as far as U.S. President Bill Clinton is concerned. Mr. Clinton called the summit in a high-stakes bid to break the peace deadlock. No other U.S. leader has offered the Palestinians the support that Mr. Clinton has. His statements after the failure of the talks suggest that he was disappointed with Mr. Arafat.

Nonetheless, it is expected that the three men will resume talks sometime in August. They have their eyes on Sept. 13. That is the seventh anniversary of the Oslo peace process and the date upon which Mr. Arafat said that he would issue a unilateral declaration of Palestinian statehood. That would be a disaster. Israel would respond by mobilizing its army and forcibly annexing territory. Violence would be sure to follow.

Palestinian officials have hinted that the deadline might be flexible. The top Palestinian governing body decided last month to give Mr. Arafat until the end of the year to decide. He should take the extra time.

Although the talks did not reach an agreement, the two sides made important progress. Issues that were once taboo — the status of Jerusalem, the declaration of a Palestinian state and the return of Palestinian refugees — were on the table. And on all but the issue of Jerusalem, the negotiators came tantalizingly close to a deal. That will not be enough to mask the disappointment — or the dismay — that many feel in the wake of the breakdown, but it should sustain their hopes as negotiators try to pick up the pieces in the weeks ahead.

A just and sustainable peace agreement is in reach if Mr. Barak and Mr. Arafat are both willing to walk toward common ground. This is no time to stop and reverse course.

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