Israel, whether it chooses to acknowledge it or not (or we do), is heading toward a one-state solution.
So, knowing that, and believing, as I do, in turning a problem into a solution, I propose the following:
Keep the settlements, but - after thorough screening and background checks - allow one third of the new apartments to go to Palestinian families (the apartments must be of equal quality). If the Palestinian families don't have the money, I think the U.S. or international community could be persuaded to cough it up in the interest of peace and interdependency. We've certainly subsidized lesser causes.
I think two-state proposals are disingenuous at best - from the Israeli side they are a delaying tactic, since the concessions necessary for co-existence, including disarmament, will never be met; from the Palestinian side they are a part of a strategy of slowly, inexorably, pushing Israel into the sea - I've never heard any credible proposal as to how a Palestinian state (let alone one as divided as Gaza and the West Bank are now) would be run.
If one had a magic box, and could place all hatred and feelings of vengeance inside it from both sides, there would still be enormous logistical challenges as to how to live in a parched, crowded, economically disparate region. The first thing a logical body politic would do is to tear down the wall, then they would improve the transportation and infrastructure. This is an interesting thought-experiment and one both sides should consider, if just to sober themselves up to the honest realities of the situation.
Of course, they won't. None of this will happen while each side is at each other's throat. But, by sharing their neighborhood, a lot could be accomplished. If the Israeli settlers just can't bear to live with ANY Palestinians, they should be moved to Israel proper, willingly or not.
It is time for new solutions. The road map was a dead-end. The Two-State solution is a geopolitical impossibility. The annihilation of Israel is in no one's interest, not even the Arabs, who would then have to contend with thousands of suddenly unemployed terrorists (more likely, Europe would, as that would be their next logical stop to recreate their Caliphate - this has been spoken of by Muslim leaders many times). Obviously, the fourth-world existence of the Gazans and that of their slightly better-off but impatient third-world cousins in the West Bank cannot continue. Obama promised change, but lofty speeches have to be backed up by a concrete plan.