Can Jerusalem be shared?

They'll also have to agree on which territory Israel should give to a future Palestine in exchange for being allowed to keep major settlement blocs in the West Bank. And if they decide not to divide Jerusalem, they'll have to determine how to share it while avoiding the potential security nightmare of an open border.

These are just some of the excruciating challenges faced by Israeli and Palestinian negotiators as they begin discussions Dec. 12 on how to end their conflict -- as agreed upon Tuesday at a U.S.-hosted Mideast peace summit in Annapolis, Md.

The Palestinians want to establish an independent state in the West Bank, Gaza Strip and east Jerusalem -- areas that Israel captured in the 1967 Mideast war.

Of all the obstacles to a peace deal, none looms larger than Jerusalem -- the city at the heart of the Israeli-Palestinian conflict, with its holy sites of such enormous importance to Muslims, Jews and Christians.

Past peace negotiations have made it clear that the city will have to serve as the capital of both Israel and a future Palestine.

But that raises more questions than it answers. How can you transfer east Jerusalem to Palestinian sovereignty without stripping its residents of Israeli social security benefits, for instance, or how can Israelis and Palestinians each have access to the city but not the other's country?

"The Palestinian vision of Jerusalem is what they call an 'open city,' with access to all parts," said Yitzhak Reiter, head of the Truman Institute think tank in Jerusalem. "From an Israeli perspective, this is a problem, because there would be no 'hard borders' between Palestine and Israel."

But there's an even thornier issue -- how to share the emotionally charged Jerusalem holy site known to Muslims as the Noble Sanctuary and to Jews as the Temple Mount. As the site contains a Muslim shrine built on the remains of a Jewish one, a solution will almost certainly require an international presence to administer jurisdiction.

The issue of refugees

Another major hurdle facing the negotiators is the issue of refugees. The Palestinians want refugees and their descendants to be able to return to homes they left, or were forced out of, in the 1948 war that accompanied Israel's creation. The demand is a deal breaker for Israelis, who sees it as a threat to their country's Jewish character.

In the end, it seems the Palestinians will have little choice but to give up their dream of returning home. But that still leaves open the question of whether Israel will meet Palestinian demands that it acknowledge responsibility for the refugees' plight.

A recent report by the Aix Group, a gathering of Israeli, Palestinian and international economists, estimated the total cost of resettling and compensating Palestinian refugees and their descendants -- a necessary element of any peace deal -- would be between $55 billion and $85 billion over 10 years. It's far from clear where such an enormous sum would come from.

It won't be an easy swap. The Palestinians will surely demand Israeli territory of equal size and value to the land they're giving up for the settlements.

Israel will also likely insist on continued control of the airspace above a Palestinian state, that such a state not have an army and that Israel maintain a military presence in strategically sensitive areas of the West Bank. The Palestinians will not easily accept any of these demands.