The Israeli leader will not likely be able to settle east Jerusalem with Jews and maintain strong relations with the Obama administration. He will be hard pressed to please his far-right coalition partners and still negotiate credibly with the Palestinians. And he cannot alienate important allies and still expect decisive international action against archenemy Iran.
Israel infuriated Washington earlier this month when it announced plans to build 1,600 new Jewish homes in the disputed part of Jerusalem during a visit by Vice President Joe Biden.
A fresh announcement Wednesday of 20 new Jewish homes planned in the heart of an Arab neighborhood prompted a White House demand for clarification even as Netanyahu was in Washington trying to ease tensions.
With Israel's international standing in tatters and its relationship with Washington at a low point, Netanyahu's moment of truth appears close. Will he stick to his hawkish roots or conclude, as his two predecessors Ariel Sharon and Ehud Olmert did, that occupying captured lands and their large Arab populations imperils Israel's future as a Jewish state?
So far, Netanyahu is showing no signs of bending on east Jerusalem, despite the international uproar over the new Israeli housing projects.
An unusual decision to keep reporters away from a meeting between Netanyahu and President Barack Obama at the White House and some pointed criticism from Secretary of State Hillary Rodham Clinton at a pro-Israel conference indicated the latest U.S.-Israeli diplomatic row is not over.
Last-minute talks Wednesday between Netanyahu and U.S. Mideast peace envoy George Mitchell - held just before the Israeli leader ended his two-day visit to Washington - failed to heal the U.S.-Israeli row over east Jerusalem settlement building, U.S. officials said on condition of anonymity because the closed-door talks were confidential.
The Americans say the east Jerusalem housing projects - which were announced shortly after Israel and the Palestinians agreed to the first U.S.-mediated indirect peace talks in more than a year - are provocative and prejudge the outcome of negotiations.
But recent comments by Clinton and the head of the U.S. Central Command could have even more sweeping implications.
Both Clinton and Gen. David Petraeus said that lack of progress toward solving the Israeli-Palestinian conflict impedes other U.S. goals around the world and fuels extremism.
Pressure to compromise can only increase if that idea gains steam along with rising international impatience with Israel, most recently illustrated by Tuesday's extraordinary decision by Britain to expel an Israeli diplomat over the alleged use of forged British passports in a plot to slay a Hamas operative in Dubai in January.
In what seemed like a veiled reference to Petraeus' and Clinton's suggestion, Netanyahu told the same pro-Israel convention in Washington this week that anti-Semitism, in its most "pernicious" form, "argues that if only Israel did not exist, many of the world's problems would go away."
The Israeli leader's speech before the American-Israel Public Affairs Committee highlighted the huge gulf between the way many Israelis and the rest of the world view east Jerusalem, which the Palestinians claim as the capital of a future state.
"Jerusalem is not a settlement. It's our capital," Netanyahu said to wild applause.
Alon Liel, former director general of Israel's Foreign Ministry, described what he called an Israeli "bubble" where the prevailing view is "let's go on settling in Jerusalem, the world is against us, the Palestinians will always be our enemy." Netanyahu, he said, is "the leader of the bubble."
On the other side, Liel said, are Israelis "who realize that this story cannot go on, that there is an international community, there is a United States, there is a world public opinion and there is a U.N. - and we have to be part of it and not live under siege ... as a pariah state."
One of the ironies of Netanyahu's year-old premiership is he has done more to ease life for Palestinians than his immediate predecessors, boosting the economy by taking down dozens of roadblocks and significantly slowing settlement construction in the West Bank.
No Israeli prime minister has even considered halting Jewish construction in east Jerusalem since Israel captured that part of the city in 1967, and the Palestinians readily sat down with Olmert for intensive peace talks even as he pressed ahead with settlements - something they are now refusing to do with Netanyahu.
So what has changed?
Palestinians tend to feel that peace is simply not possible with Netanyahu. While he grudgingly accepted the notion of a Palestinian state early in his term, he has spent the subsequent months broadcasting his red lines: that Palestinians must recognize Israel's Jewish nature, that any future Palestinian state can't have an army, that Israel must maintain a security presence in the West Bank and, perhaps most critically, that Israel can never share Jerusalem.
"Netanyahu and his coalition will always give priority to the occupation and settlement expansion rather than the peace process," Palestinian government spokesman Ghassan Khatib said.
The row over east Jerusalem settlements has been a public relations boon for the Palestinians. However, they relinquished some of the moral high ground in recent days through a decision to rename a major West Bank square after a female militant who killed dozens of civilians in a notorious 1978 bus hijacking.
In some ways Netanyahu, with his solid public support and his widely appreciated security credentials, is the politician best positioned to make peace with the Palestinians. But it would have to be Mr. Obama - not the U.S. lawmakers who lavished effusive praise on Netanyahu this week in Washington - to push to make that happen.