While I agree with you that the ideal of two sovereign states living side by side in peace might be desirable the difficulties that would have to be overcome to achieve this are so formidable that it may be impossible, at least for the foreseeable future. And no matter how giggly some pro Palestinian folks may get contemplating a one state solution, or no matter how clever Jimmy Carter may think he is suggesting it is the only alternative to Israel caving in to Arab demands, there is no support for such an idea in Israel and the rest of the world is just not interested enough in what happens to the Israelis or the Palestinians to commit to trying to impose it.
Caving in to Palestinian demands? giggly? I pretty much agree with you on the one state (non) solution its a no brainer.
So where does that leave us? One idea that has been suggested is that Israel, Egypt and Jordan return to the ideas of UNSC 262, the land for peace resolution, and that they sign treaties in which Israel returns to Jordan most of the land it captured in the 1967 war and it returns Gaza to Egypt. This may seem far fetched to some, but the Jordanians are taking it seriously. When Jordan annexed the West Bank in the 1950's, it made all the Arabs there Jordanian citizens and while since the 1967 war Jordan has been wobbly at times in recognizing their citizenship rights, it is now about to revoke these rights in response to suggestions from Israeli politicians that the Palestinians should really be a Jordanian and Egyptian problem. While this solution has a certain charm from a historical perspective, it is no more of a practical reality at this time that a two state or a one state solution is.
Why would it not be a practical reality? Ill admit, I have not heard of it being taken seriously. My impression has been that no one really wants a potentially volatile Palestinian population under their auspices. I also suspect that not resolving the issue has as many political benefits for some of the Arab countries as it does for Israel as it deflects the more radical elements of their populations from focusing their discontent internally.
Very interesting I did not know this, you add a new dimension to the resolution of this conflict 
There is absolutely no basis in fact for believing that any Israeli concessions on the settlements, or even on building in the settlements that is not a part of an larger agreement will lead to any positive outcomes for either the US or for Israel. We can speculate on how the Arabs or the Palestinians might respond to this or that Israeli concession, but we have no basis in fact for believing in any of these speculations. The Palestinians could create such a basis in fact by creating a stable government and using these new security forces to effectively end attacks against Israel.
The settlements are a constant point of provocation to the Palestinians and they also create the impression that Israel is not a trustworthy negotiating partner. It is also impossible to create a viable state with settlements as they stand. The more settlements continue to spread the harder it will be to make them part of any agreement at all and the harder (politically) it will be to dismantle them and the Israelis know this. Even internally they provide a major point of political friction. Hardliners and extremists in both cases drive a great deal of the conflict and if they can be circumvented by the more moderate factions chances of success might be higher. By halting the settlements, the Israelis would be sending a message that they are serious about peace. By halting the attacks on Israel the Palestinians would be sending the same message. But both may be politically impossible.
However, as a practical matter, do you really believe that if the Israelis and Palestinians came to agreement on the refugees, Jerusalem access between Gaza and the West Bank and a host of other issues like trade and resources that the Palestinians would say, "No, we couldn't possibly accept a Palestinian state that didn't include precisely that 5 1/2 % of the West Bank (the land Israel proposed to keep in the 2000 negotiations in exchange for pre 1967 Israeli land)"?
I dont know.
The settlements are a constant point of provocation for the Palestinians, at least some of the Palestinians, and the refugees are a constant point of provocation for the Palestinians and Jerusalem is a constant point of provocation for the Palestinians and the lack of contiguousness between the West Bank and Gaza is a constant point of provocation for the Palestinians and the existence of Israel as a Jewish state is a constant point of provocation for the Palestinians. The Palestinians complain most about settlement activity not because it is the most important to them but because it is the one that has gained the most traction among major powers. All of these issues need to be considered as a part of a final settlement agreement so that a concession on one issue might be compensated for by a gain on another issue.
As for Israel not being perceived as a trustworthy negotiating partner, the evidence says otherwise. After the 1967 war, Israeli settlements sprang up all over Sinai, an area that has great historical and religious significance for many Jews because many people and events that are mentioned in the old testament took place there. Sinai contained producing oil wells and arguable claims to any off shore fields that might later be discovered, the uncertainty of Israel's oil supply being a critical vulnerability, and Sinai also provided a substantial buffer between pre 1967 Israel and Egyptian military forces - if the 1973 Egyptian attack had be launched from Israel's present border with Egypt, even if Israel had won that war, much of Israel would have been destroyed or severely damaged and many more Israelis killed. Nonetheless, when after tough and sometimes bitter negotiations between Israel's right wing PM and Sadat, two life long enemies, a final agreement was reached in which Sinai was to be returned to Egypt in exchange for assurances of peace and the settlers refused to leave, Ariel Sharon led IDF forces into Sinai and dragged the settlers kicking and screaming back to Israel. There is every reason to believe that if Israel were to reach a final status agreement with a stable Palestinian government that had the will and the means to live up to its side of the bargain, Israel would live up to its side this time, too.
When discussing the settlements and the shape and viability of a future Palestinian state, it is important to define our terms. In the 1980's, Israel defined the borders of the major settlement blocs including all the land that future growth was expected to need, roughly 5 1/2% of the West Bank. In the 2000 negotiations, when Barak spoke of the settlements Israel insisted on
keeping, it was almost exactly the same 5 1/2% and when Olmert was negotiating with Abbas, it was still this same 5 1/2% he was insisting on keeping.
Maps that show the present situation include dozens of settlements and outposts, legal and illegal under Israeli law, that Israel does not intend to keep in a final status agreement, as well as Israeli only access roads, security roads and security outposts, in all comprising about 20% of the West Bank and making access difficult, even without roadblocks and checkpoints, to other areas of the West Bank, but since the negotiations during the Clinton years, Israel has agreed to abandon all but the 5 1/2% of the West Bank on which the major settlement blocs stand. Of the major settlement blocs that make up this 5 1/2%, all but one are contiguous with pre 1967 Israel, and that one is much, much closer to the rest of Israel than Gaza is to the West Bank. The Olmert government and Palestinian negotiators had actually reached the point where they were arguing about how much pre 1967 land Israel should give up in exchange for the land the settlements are on and exactly where that land would be. All the indications are that the settlements will be the easiest of all the major issues to settle in the context of final status negotiations.
Obama has argued that settlement construction should end because the Palestinians claim the land the settlements are on for their future state and continued construction will bias the negotiations against them, similar to the argument you are making, but the Israelis also claim the land the major settlements are on for their state after final final status negotiations, and they believe ending construction will be seen as a tacit validation of Palestinian claims to the land, thus biasing negotiations against their claims. Both points are valid, which is why this issue should be dealt with in the context of final status negotiations.
Still, past Israeli governments have agreed to temporary freezes on settlement activity under US pressure because Israelis value good relations with the US so highly that a government that couldn't or wouldn't get along with the US president would be voted out of office, as Bush41 forced the Shamir government from power and Clinton forced the first Netanyahu government from power, but Obama has poisoned this well. Past US presidents first tried to settle difference with Israel through quiet diplomatic channels, as allies do with allies, before allowing the issue to go public, but Obama made his demands that Israel end construction in the settlements public before allowing negotiations to do their work, and to the Israelis this seemed they were being treated more like adversaries than allies.
Before Obama made these public demands, when Livni claimed she could get along better with the US than Netanyahu could, her approval ratings went up and his declined, but when Netanyahu responded to Obama's demands by refusing to end construction within the major settlements, his approval ratings almost doubled, and when Livni criticized his response, her ratings plummeted. When Obama later stated in his Cairo speech that the settlements were illegitimate, dramatically repudiating past US policy - both Clinton and Bush43 had stated that the major settlement blocs would have to become part of Israel in any realistic future final status agreement, and even Carter, often thought to be one of Israel's harshest critics recently state that he never imagined that Gush Etzion, a major settlement bloc near Jerusalem, would not become part of Israel in a final settlement agreement - Israelis were further astonished and outraged, and when the Obama administration most recently stated that it considered east Jerusalem just another Israeli settlement, he defined his position as squarely in the Palestinian camp in the minds of almost all Israelis - in a recent poll only 6% of Israelis trusted him. Since support for Netanyahu's positions on these issues is overwhelming across all three political parties, it's hard to see how the US will have a meaningful role to play in peace talks or how it will be able to facilitate the creation of a Palestinian state.
