Imagine a tribal leader in a desert area where sand is everywhere. There are no trees, rivers or mountains, nothing to look at and say, "This is the border of our land, this is the place that we will fight to defend." Since there are no natural landmarks to relate to, that commander then takes a stick and drags it along the ground, (and in that sense "draws" a line in the sand), and says, "Here is the border of our land that we will fight to defend.
Beyond this line, no enemy must come." It is from that exotic image that we get this idiom meaning to define a symbolic point beyond which there is no further compromise. Whatever ideas or discussions are on one side of the line, that is okay, but beyond that point there can be no further discussion. The "line in the sand" represents a symbolic border for negotiations.
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