JERUSALEM, July 29 –– The last substantive meeting at Camp David began after dinner Tuesday and lasted past midnight.

For 3 1/2 hours, a Palestinian and an Israeli negotiator listened intently as President Clinton described how Jerusalem could be divided, its borders redrawn and its holy sites governed to suit both sides.

The proposal was stunningly far-reaching, and the Israelis seemed ready to back it. Israel's willingness to grant the Palestinians sovereignty over some parts of historically Arab East Jerusalem, and effective control over others, was precisely the concession that Israeli Prime Minister Ehud Barak had said he would never make--even as he was willing to support creation of a Palestinian state.

But Palestinian negotiator Saeb Erekat sat glumly waiting for the magic words--"full sovereignty" over all of pre-1967 East Jerusalem. Without that, the proposal was "a nonstarter," he told Clinton. The Palestinians formally rejected the offer shortly after 2 a.m. Wednesday, effectively ending the summit.

Hours later, another Palestinian negotiator approached Israeli diplomat Shlomo Ben-Ami and tried to put the best face on a tepid joint statement the Americans had drafted. Ben-Ami, ordinarily the most courtly of diplomats, told him where he could "stick" the document--literally. "You're offered a state and you make do with a memo," added Ben-Ami with disgust.

So concluded a breathtakingly ambitious and wide-ranging attempt to consign to history the Israeli-Palestinian dispute, the conflict at the heart of the Middle East's wars, terror and loathing for the better part of a century.

The 14-day meeting failed despite thousands of hours of preparatory work in recent months, despite dozens of secret and less-secret negotiations at every level, and despite Clinton's intensive, personal ministrations. The president was well versed with the minutiae of the dispute over the labyrinthine political geography of Jerusalem's Old City.

"You had here a unique opportunity after 50-some years, sitting together with a concerted effort by the [Clinton] administration and both sides, two weeks with almost no leaks," said Dan Meridor, an Israeli negotiator. "You could talk almost entirely freely and you knew the timetable was very short, that the clock was ticking."

Despite the collapse, important progress was achieved. For the first time, the two peoples who are rivals for the same piece of land between the Mediterranean Sea and the Jordan River disclosed to one another their bottom lines, or at least, their bottom lines for now. In the process, they butted heads over 3,000 years of history, told jokes, insulted each other and, finally, brainstormed more intensively and at a higher level than ever before.

The summit's failure, coupled with the extraordinarily far-reaching proposals that were on the table when Palestinian leader Yasser Arafat walked away, is generating shock waves in Israel, among the Palestinians and throughout the Middle East.

Barak's willingness to divide Jerusalem--described by a variety of sources, including Israelis, Palestinians and Americans who attended the talks--has had a particularly big impact. The proposal would have allowed Arafat to proclaim the capital of his independent state in Jerusalem, fulfilling his lifelong nationalist ambition. But it is drawing bitter criticism from Barak's domestic political opponents.

Officials who took part in the summit said Barak seemed prepared to accept a U.S. proposal for Palestinian sovereignty over large Arab neighborhoods in northeastern Jerusalem taken by Israel in the 1967 Middle East War. Those include Beit Hanina, Shuafat and part of the Kalandia refugee camp. The Palestinians may also have gained control of northern Jersualem's Atarot airport.

Moreover, the American proposal, in at least one of its variations, included extending substantial Palestinian control or sovereignty over the Muslim and Christian quarters of Jerusalem's walled Old City, including the Church of the Holy Sepulcher, built on the site where Christians believe Jesus was crucified. The Jewish and Armenian quarters would have remained with Israel.

Perhaps most critically, the proposal would have formally extended Palestinian control--but not sovereignty--over the Temple Mount, known to Muslims as the Haram al-Sharif, and ensured unfettered access to it. The 30-acre paved platform, one of whose sides is the Western Wall (often called the Wailing Wall), is the holiest site in Judaism. It is the third holiest site in Islam, after the holy cities of Mecca and Medina in Saudi Arabia.

According to some accounts, Barak may have been ready to allow a Palestinian flag on the Temple Mount as long as Israel retained formal sovereignty over it. Under such an arrangement, Arafat, the man many Israelis still regard as a terrorist bent on the Jewish state's destruction, could conceivably have established his headquarters in the Old City's Muslim quarter--off-limits to the Palestinian leader for more than 30 years.

Arafat, said one official, would have exercised practical control over all of the Temple Mount and its two mosques, Dome of the Rock and al-Aqsa, with the exception that any excavation of the site would be barred.

In return, the Palestinians would have given up their long-standing and internationally backed insistence that Jewish settlements in the predominantly Palestinian West Bank and Gaza Strip are illegal and must be uprooted. They would have accepted Israeli annexation of at least three chunks of the West Bank, where clusters of large Jewish settlements have been built since 1967.

That would have allowed about 150,000 Jewish settlers to remain in their homes under internationally recognized Israeli sovereignty, a prospect that Barak has said would be "a historic achievement." Another 50,000 or so Jewish settlers would have faced probable evacuation.

In all, the Israelis said they would have forfeited 88 percent to 92 percent of the West Bank, land considered sacred by many religious and nationalist Jews.

Much remained to be done. The two sides appear not to have bridged their differences entirely over the issue of Palestinian refugees, for instance. Scattered throughout the Middle East, more than 3 million Palestinians classified as refugees insist on their right to return to homes in Israel from which they fled or were evicted during Israel's 1948 War of Independence. Israel was offering the refugees compensation (to be funded largely by the West), but the return of only a few thousand spread out over many years.

Despite the remaining gaps, the Americans thought the deal workable. From Israel's perspective, Barak's concessions were so far-reaching, particularly on Jerusalem, that one Israeli negotiator privately expressed surprise at the prime minister's daring.

Nonetheless, Arafat said no, and even the moderates on his delegation joined ranks publicly.

"It will be sovereignty over the Haram al-Sharif or nothing," said Hassan Asfour, a Palestinian negotiator. "We can't sell our Haram to the Jews. This place is holy to the Islamic world."

Through the negotiations, Barak and Arafat kept mostly to their individual cabins. The two sat face-to-face just once, not counting one or two sessions with Clinton. When they did meet, said officials from all sides, there was no particular warmth.

That left much of the onus on the American mediators and the two sides' negotiators, most of whom have gotten to know each other well in recent months. Still, there were revealing clashes.

In the Monday night meeting, for instance, Erekat took issue with Ben-Ami's contention that Solomon's Temple, the Jewish sacred site built 3,000 years ago, had really once stood on the Temple Mount. As the two negotiators debated, Clinton looked on amazed.

"I don't believe there was a temple on top of the Haram, I really don't," said Erekat.

Ben-Ami, stunned, pulled down a volume from a bookshelf and looked up Temple Mount, showing Erekat dozens of references to Solomon's temple and its successor that stood until it was destroyed by the Romans in 70 A.D.

Hours after their exchange, the summit collapsed. Both sides declared it was up to the other to show more flexibility. Clinton said Arafat's intransigence on Jerusalem was largely to blame.

The two sides now face a cloudy future and the possibility of a unilateral declaration of Palestinian statehood this fall. Given the residual bitterness from the summit, though, there is surprising agreement from the two sides that the summit pushed the negotiations to a new level, and tantalizingly close to success.

"We went through a process of taking out the envelopes and getting into the core nucleus positions," said Gilad Sher, an Israeli negotiator.

Said Erekat: "After Camp David, our negotiations with the Israelis will never be the same. I think we're on much stronger ground now to achieve an agreement than ever before."