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What is happening in Iran? On the surface, the country has returned to normalcy. Demonstrations have become infrequent, and have been quickly dispersed. But underneath the calm, there is intense activity and the beginnings of a political opposition. In the past week, Mir Hossein Mousavi, the candidate who officially lost last month's presidential election, has announced his intention to create a "large-scale social movement" to oppose the government and press for a more open political system. Mohammad Khatami, the reformist former president, has called for a referendum on the government. Another powerful former president, Ali Akbar Hashemi Rafsanjani, has criticized the regime's handling of the election and post-election "crisis." All three have demanded the release of politicians and journalists imprisoned over the past month and held without charges. (Those prisoners include Maziar Bahari, NEWSWEEK's Tehran correspondent, a Canadian citizen, and an internationally recognized documentary filmmaker.) These are not dissidents in the wilderness. Between them, the three men have been at the pinnacle of power for most of the Islamic Republic's existence.

More striking has been the revolt of the clerics. Iran has only a score or so grand ayatollahs, the highest rank in the Shiite clerical order. Few have publicly supported President Mahmoud Ahmadinejad. At the same time, according to the indispensable Tehran Bureau Web site, six grand ayatollahs have publicly criticized the regime. Last week one of them issued a fatwa (a religious ruling) declaring that it was appropriate to boycott Ahmadinejad's inauguration as president. He also directly criticized the country's Supreme Leader, Ayatollah Ali Khamenei.

The clerics' actions highlight a shift in power in Iran away from the religious establishment and toward the military. Ahmadinejad represents this change, being a layman, a veteran of the Iran-Iraq War, and a man with close ties to the Revolutionary Guards, the parallel military created by Ayatollah Ruhollah Khomeini because he distrusted the shah's officer corps. While in office, Ahmadinejad has directed state funds away from the religious foundations dominated by clerics and toward the military and the Guards.

The tilt from mullahs to the military has been somewhat obscured by the role that Khamenei has played as part of both camps. He is, of course, a cleric, but he has always been close to the Revolutionary Guards and cultivated their support. Ahmadinejad, however, is clearly not of the clerical establishment. He's even defied Khamenei, his key backer, by initially refusing to withdraw his choice for first vice president despite the Supreme Leader's objections. While it is difficult to know exactly what the dispute between Khamenei and Ahmadinejad reflects, it is surely a sign of an increasingly divided ruling elite.

The hyperbole in America and Israel about apocalyptic mullahs with nukes missed the big story in Iran, which was that the mullahs were not apocalyptic, and they were fading in influence anyway. One might have said that the Islamic Republic of Iran is losing its distinct religious basis of power and becoming another Middle Eastern dictatorship—except that it now hosts an opposition movement that does not seem ready to quiet down.

What does this turmoil mean for Washington and the world's dealings with Iran? Obviously it makes negotiating with Tehran close to impossible right now. Any talks with Ahmadinejad would confer legitimacy on a regime that has lost it at home. And any gains agreed to in talks with a regime that is searching tactically for legitimacy might well prove to be temporary.

The best strategy is to do nothing. Hillary Clinton implied as much when she put off the question of negotiating with Iran. In fact, the ball is in Tehran's court anyway. In April, the West presented Iran with an offer of talks that is serious and generous. Let Khamenei and Ahmadinejad figure out how to respond, as they keep claiming they will. The West faces constraints, but they face many more.

Some argue that this allows Iran to inch closer to a bomb. But the best way to blunt that threat—which is still not imminent—has always been deterrence and containment, a policy that worked against Stalin and Mao and works against North Korea, a far more unstable and bizarre regime. Again, Secretary Clinton correctly outlined such a policy last week. (On being offered a nuclear umbrella, Israel criticized the United States, which is a sign of the current Israeli government's poor relations with Washington.)

Time is not on the current Iranian regime's side. Amid all this confusion, we have a clear answer to a crucial puzzle. We always wondered, are there moderates in Iran? Yes, it turns out—millions of them.