Only two days after the president and Israeli Prime Minister Benjamin Netanyahu announced their agreement on the need to halt Iran’s nuclear ambitions, Iran’s test launch of a medium-range missile that could reach Israel seemed to come as a slap in Obama’s face.

Iranian President Mahmoud Ahmadinejad, who faces re-election in three weeks, told thousands of his supporters that the missile, also capable of striking U.S. bases in the Persian/Arabian Gulf, was a blow to those trying to thwart Iran’s nuclear program.

“In the nuclear case, we send them a message: Today the Islamic Republic of Iran is running the show,” The Washington Post quoted him as saying in a speech at a soccer stadium that was broadcast live on Iranian television. “We say to the superpowers: Who of you dare to threaten the Iranian nation… Every center of power which wants to shoot a bullet, before it can put its finger on the trigger, we will cut its hands and send it to hell."

Obama appears to be exploring a more comprehensive approach toward the region’s problems in search of a “grand bargain” that would both settle the longstanding Arab-Israeli conflict and end Iran’s regional threats.

Israel responded to Iran’s missile test as presenting nothing new. "In terms of strategic importance, this new missile test doesn't change anything for us since the Iranians already tested a missile with a range of 1,500 kilometers, but it should worry the Europeans," Deputy Foreign Minister Danny Ayalon told Israel Radio. "If anybody had a doubt, it is clear the Iranians are playing with fire."

While Obama rejected any “artificial” deadline for U.S.-Iranian negotiations, he indicated that Washington would be in a position to judge whether talks were proceeding in “good faith” by the end of 2009. The implication is that the U.S. would move to implement “crippling” sanctions against Iran if it continued to ignore warnings enshrined in U.N. Security Council resolutions calling on Iran to halt its uranium-enrichment program.

In her Senate testimony last month, Secretary of State Hillary Clinton predicted tighter and more robust sanctions if Iran continues its defiance of international demands. But it is not yet clear whether European allies, Russia, and China would be on board to implement these sanctions.

Robert Satloff, executive director of the Washington Institute, said he believes that the Obama administration “has wagered that a strategy of “carrots first, sticks later” will achieve better results than a strategy of “bigger carrots, bigger sticks.” He explains in Policy Watch, one of his institute’s publications, that both Tehran and Jerusalem are likely to interpret the president’s announcement as accepting that Iran, for the next six months, will continue to spin centrifuges without incurring significant additional cost, and that “decisions on what to do about this situation will be made in 2010.”

Gary Samore, the top White House counterproliferation official, told the Post the missile was “a significant step forward in terms of Iran’s capability to deliver weapons.” Other experts said it was a new version of an existing missile that was successfully tested late last year and has a range of about 1,200 miles.

U.S.-Israeli differences over how to deal with Iran’s perceived nuclear threat appear to have spilled over other priorities on Obama’s regional diplomatic agenda. While Netanyahu tried to impress on Obama that dealing with the Iranian threat could pave the way for advancing an Israeli-Palestinian peace settlement, the U.S. president saw it the other way—a settlement to the Israeli-Palestinian conflict could facilitate a containment of Iran. He called on Netanyahu to put a freeze on the building of illegal settlements in occupied Palestinian territories in East Jerusalem and the West Bank.

However, and in parallel, Obama appears to be exploring a more comprehensive approach toward the region’s problems, searching for a “grand bargain” that would both settle the long-standing Arab-Israeli conflict and end Iran’s regional threats, including those related to its support of hardline militant organizations such as Hezbollah in Lebanon and Hamas in the Palestinian territories.

So far, Obama’s olive branch extended to Iran appears to have been rebuffed. But some analysts argue that Ahmadinejad’s current bravado has more to do with local electoral considerations than foreign-policy positioning, urging patience until after the Iranian presidential elections, whose outcome is unpredictable at this point.

But come the end of 2009, Obama will have probably run out of Cupid’s arrows in his diplomatic quiver, putting him either on a collision course with Israel, which is advocating a preemptive military strike, or with Iran, which has so far been buying time.

Salameh Nematt is the international editor of The Daily Beast. He is the former Washington bureau chief for the international Arab daily Al Hayat, where he reported on U.S. foreign policy, the war in Iraq, and the U.S. drive for democratization in the broader Middle East. He has also written extensively on regional and global energy issues and their political implications.