America and its Middle Eastern allies have every reason to panic. The green flags of Hamas are furling over Gaza and the al-Fatah forces trained and financed by the United States have ignominiously fled. Fears are rife that Iranian-backed and Syrian-hosted terror will next achieve dominance over the West Bank and proceed to undermine the pro-Western governments of Lebanon, Jordan, Egypt and the Gulf.

To avert this catastrophe, the U.S. has joined with the Israelis and the Europeans in resuming the flow of hundreds of millions of dollars in financial aid to the Palestinian Authority under the leadership of its Fatah president, Mahmoud Abbas, and accelerating talks for the establishment of a West Bank Palestinian state. The goal is to provide Palestinians with an affluent, secular and peaceful alternative to Hamas, and persuade Gazans to return to the Fatah fold. But the policy ignores every lesson of the abortive peace process to date as well as Fatah's monumental corruption, jihadism and militancy. Indeed, any sovereign edifice built on the rotten foundations of the Palestinian Authority is doomed to implode, enhancing, rather than diminishing, Hamas's influence.

Since its creation by the so-called Oslo Accords of 1993, the PA has garnered more international aid than any entity in modern history -- more, per capita, than the European states under the Marshall Plan. The lion's share of this fortune has been siphoned into the private accounts of Fatah leaders or used to pay off the commanders of some 16 semi-autonomous militias. The PA also maintains an estimated 60,000 uniformed gunmen on its payroll, giving the West Bank the world's highest percentage of policemen-to-population.

The Palestinian people, meanwhile, languish in ever-deepening poverty and unemployment, while lawlessness plagues Palestinian streets. The unbridled corruption of the PA and its Fatah headmen served as a principal cause of Hamas's electoral victory in 2006, as well its takeover of Gaza. Viewers of Hamas television have recently been treated to tours of the lavish villas maintained by Fatah officials in the Strip, and video clips showing PA policemen, more abundantly armed and more numerous than Hamas's troops, fleeing at the first sign of battle.

Though Fatah originally aspired to replace Israel with a secular, democratic state in Palestine, the organization refashioned itself in 1990s as an Islamic movement, embracing the lexicon of jihad. Hundreds of mosques were built with public funds, and imams were hired to spread the message of martyrdom and the hatred of Christians and Jews. These themes became the staple of the official PA media, inciting the suicide bombings that began in 2000 and poisoning an entire generation of Palestinian youth. Ironically, the Islamization of Fatah legitimized Hamas and contributed to the cadres of religious extremists who are now defying its authority.

In addition to its fiscal malfeasance and Islamic radicalism, Fatah has never fulfilled its pledges to crack down on terror. Though Mahmoud Abbas routinely criticizes Palestinian terrorist attacks as "contrary to the Palestinian national interest" -- not an affront to morality and international law -- he has never disavowed the al-Aqsa Brigades, a Fatah affiliate responsible for some of the bloodiest attacks against Israeli civilians.

In the past, such assaults have served as a means of maintaining Fatah's legitimacy as a resistance movement and countering charges that the organization sold out to America and Israel. In fact, a distinct correlation exists between the amount of support that Fatah receives from the West and its need to prove its "Palestinianess" through terror.

In view of its performance over the past 14 years, the Palestinian Authority under Fatah can be counted on to squander most or all of the vast sums now being given to it by the U.S. and the international community. More gunmen will be hired and better weapons procured, but in the absence of a unified command and a leadership worth fighting for, PA soldiers will perform no more credibly than they did in Gaza. Mr. Abbas will continue to denounce terror while ignoring the terrorist units within his own organization, while PA imams will persist in preaching their jihadist sermons.

In response, Israel will be precluded from lifting the checkpoints that not only block suicide bombers but hinder communication between Palestinian cities. Impeded by Palestinian attacks and Israeli countermeasures, the peace talks will inexorably grind to a halt. In the end, the Palestinian people will remain impoverished, divided and stateless, and more than ever amenable to the purist polity of Hamas.

If funding and empowering Fatah is not a viable option for the U.S., what other courses might the administration take? Clearly no progress toward Palestinian statehood can be made before Fatah has reformed itself financially, ideologically and structurally. Even under the most propitious circumstances this process is certain to take many years -- longer if economic aid and political support are provided to the PA unconditionally. Similarly, proposals for containing Hamas's influence by stationing an international force along the Gaza border are unlikely to succeed if for no other reason than Hamas's avowed determination to resist such a deployment. Yet the need to combat Hamas and provide Palestinians with an attractive diplomatic horizon remains acute. There is, fortunately, an interim answer.

The U.S., together with its Quartet partners, can work to establish areas of extensive Palestinian autonomy in the West Bank. Within these districts, local Palestinian leaders will be fully empowered to manage all aspects of daily life including health, education and resource management. A national assembly, comprised of representatives from each district, will meet regularly to deliberate issues of West Bank-wide concern. Security, however, will be jointly administered by Israel and Jordan. The Jordanian involvement is crucial to convincing Palestinians that the status quo of occupation has ended and they may in the future assume full responsibility for their internal defense. Such an arrangement will benefit Jordan as well, by facilitating its efforts to fight radicalism and stem the flight of Palestinians over its borders.

Visiting Washington this week, Israeli Prime Minister Ehud Olmert described the Hamas conquest of Gaza as an opportunity for the Palestinians. This indeed may be the case, but not by resurrecting long-failed policies and imposing a state structure on a corrupt and incompetent Fatah. Doing so is tantamount to investing in the Titanic. Significant opportunities do, however, exist for policy makers -- American, Israeli, and Palestinian -- who are willing to consider new paradigms and incremental steps toward the realization of a durable peace.

Mr. Oren is a senior fellow at the Shalem Center and the author of "Power, Faith, and Fantasy: America in the Middle East, 1776 to the Present" (Norton, 2007).