The problem is that Netanyahu has no motivation to maneuver Hamas into moderation, because an extremist Hamas is really Netanyahu’s best friend. A Hamas that moderates its stance and takes the way of the IRA from a terror organization to a legitimate party in a peace process is an existential threat to Netanyahu’s political future. Without a hard-line Hamas, he would be left with no case against a Palestinian state, and he would have to face open conflict with the hard-line right-wingers in his own party and in his coalition in actual moves towards peace.
Expect Netanyahu to do everything to torpedo recognition of Palestine; expect him to try to weaken Fatah, Abu Mazen and Fayyad, and thus to strengthen Hamas’ extremist wing. As a result, Israel’s legitimacy will indeed come under ever more fire. But let’s face it: this is good for Netanyahu. No right-wing politician ever stayed in power if he didn’t succeed in frightening his electorate to death.
Netanyahu really is a monster of a man - a sociopath will little regard for not only the Palestinians, but his own country. His unwillingness to negotiate in good faith has caused untold bloodshed and misery, and he is perhaps the most serious threat to peace in the region. It is a very tricky proposition for Obama to bargain with him as he simply does not care to give anything back. For Netanyahu, it is his way or the highway, and he'll use as many underhand methods as he feels is necessary to get his way. He has already publicly disrespected Obama by announcing that Israel would never revert to the 1967 borders, seemingly oblivious to the fact that he is completely dependent on US money to continue occupying Palestinian land.
The problem is that Netanyahu knows that Obama is heavily dependent on Jewish money and support for the election in 2012 and will shamelessly exploit this in order to get what he wants. When Netanyahu complains in any way about Obama, the Republicans dutifully accuse Obama of 'throwing Israel under the bus' in an attempt to draw Jewish voters away from him. The rhetoric escalates to the point of absurdity, but it is done intentionally to paint Obama as a radical anti semite (a ridiculous notion countered by the factual record).
I don't think Obama has been nearly harsh enough with the Israelis, but I do understand that he is between a rock and a hard place and has little room to maneuver. It does appear that Obama is using the death of Osama Bin Laden and the pro democracy movements in the Middle East as a way of redefining US involvement in the region, but with friends like Netanyahu, progress will still be very hard to come by.