"This is from Washington's point of view and from Pakistan's point of view, and even among the real well-wishers on both sides who are appalled and befuddled that we can't get past all of this and move beyond," said the official, speaking on condition of anonymity because of the sensitivity of the issue.
After years of frosty relations caused by Pakistan's nuclear weapons program, Washington and Islamabad were thrust together on Sept. 11, 2001, when al-Qaida attacked New York and Washington. The U.S. demanded Pakistan support the war against bin Laden and his Taliban hosts in Afghanistan. The U.S. directed billions of dollars in aid to Pakistan and sought to convince Islamabad it was not simply interested in a "transactional" relationship based on counterterrorism cooperation, but wanted a long-term strategic partnership.
U.S. officials have largely abandoned that argument over the past 18 months as the relationship has suffered repeated crises.
"Because of the toxic atmosphere on both sides, the two countries cannot even work in a transactional way," said Lodhi, the former Pakistani ambassador.
In January 2011, a CIA contractor sparked outrage when he shot to death two Pakistanis in the city of Lahore who he claimed were trying to rob him. Anger over the incident was still simmering when the U.S. killed bin Laden in May.
In November, American airstrikes killed 24 Pakistani troops at two Afghan border posts. The U.S. has said it was an accident, but the Pakistani army claims it was deliberate.
Pakistan retaliated by kicking the U.S. out of a base used by American drones and closing its border to NATO supplies meant for troops in Afghanistan. Negotiations to reopen the route have been hampered by Islamabad's demand for much higher transit fees and Washington's refusal to apologize for the deaths of the Pakistani troops.
The U.S. has attempted to bridge the difference over money by offering to repave highways used by the supply trucks, said a U.S. official, speaking on condition of anonymity because of the sensitivity of the issue.
But Pakistani officials have made clear the route will not reopen without some kind of apology. The U.S. has expressed its regret over the incident but has refused to apologize for fear it could open the Obama administration up to criticism by Republicans upset with Pakistan.
A senior U.S. defense official, Peter Lavoy, arrived in Pakistan on Friday to participate in the negotiations. But Panetta's comments could complicate matters.
Such statements do "water down the willingness to cooperate with the United States," said Imtiaz Gul, director of the Islamabad-based Center for Research and Security Studies.
President Barack Obama showed U.S. anger over the supply issue at a NATO summit last month in Chicago by refusing a one-on-one meeting with Pakistani President Asif Ali Zardari.
However, the U.S. and Pakistan both have reasons to walk the relationship back from the brink.
The U.S. continues to receive some intelligence cooperation from Pakistan on militants and has been able to continue drone strikes in Pakistan's tribal region despite public protests, likely because of tacit agreement by Pakistani military leaders. Both could be threatened if the relationship heads farther south.
Just as important is Pakistan's support on the Afghan war. Pakistan is seen as key to striking a peace deal with the Taliban and their allies in Afghanistan that will allow the U.S. to withdraw most of its combat forces by the end of 2014 without the country descending into further chaos.
Pakistan is keen on freeing up over a billion dollars in frozen U.S. aid, which will only be released if it reopens the supply line. Also, Pakistan can ill afford to become a true enemy of the U.S. at a time when it is struggling to contain its own Taliban insurgency and right its stuttering economy.
But politics on both sides make breaking the impasse difficult, particularly with U.S. elections this fall and Pakistani elections due early next year — possibly even sooner.
Historically, Pakistan's army has steered the relationship with the U.S. But fearing public backlash in a country where anti-American sentiment is rampant, the generals have tossed the NATO supply line issue to Pakistan's weak and unpopular civilian government. The politicians are reluctant to do anything that could hurt their election prospects.
"The longer Islamabad delays and dithers, the opinion in Washington is hardening," said Lodhi. "Time is the enemy of a reset in relations."
AP Special Regional Correspondent for Afghanistan and Pakistan Kathy Gannon contributed to this report.
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