In the early twentieth century, when France and Britain took over the Middle East, there were two types of Imperialism. One was slash-and-burn imperialism which strove to take what could be taken from the region and disregarded "native" rights. The other was a paternalistic imperialism which strove to help the natives and prepare them for independence. Ultimately both were part of the same phenomena, they both considered Europeans had a right to determine and control local affairs, just one did it in a nice way and the other did not.
There were similar trends in US controlled Iraq. There were those who worked to extract as much oil as possible and get fat contracts for US companies and those that saw their mission as establishing Iraqi democracy and getting out of Iraq as soon as possible.
A similar situation exists now over Israeli control of the West-Bank. There are the settler, slash-and-burn tacticians who want to take as much territory as they can and the paternalistic Israelis who argue that a Palestinian state is not viable and therefore the Palestinians should be integrated into Israel. Ultimately both sides are arguing for the same end-result: continued Israeli control of the West-Bank without a withdrawal.
Both sides have an eventual objective of a single state. One wants a single state with Arabs and the others want it without. I might add that Hamas are also single state advocates, wanting a single state without Jews. There is of course no possibility of attaining these ends without violence and the end result is highly unpredictable. Given a choice between a joint state and a Jewish-only state most Israelis will elect to end the Arab presence so advocating a single joint state is more likely to create a Jewish only state. On the other hand the only free elections ever held in the Palestinian territories resulted in a Hamas landslide, so clearly that is what most Palestinians want.
The best - and most viable - solution is an Israeli pull-back to the wall ("separation barrier"). That means uprooting all the settlements outside the wall and giving the Palestinians complete autonomy everywhere else. It is also a significant step towards a two state solution. for years the international community has called on Israel to withdraw from the West Bank to some degree and the Camp David accords require that Israel grant the Palestinians autonomy.
All options are fraught with risks for the Israelis, but withdrawing to the wall has a lot of advantages. It leaves Israel in accord with the UN Security Council's requirements, the settlements outside the wall are a bone in the Palestinian's throat, and indefensible by Israel in the long term. They require an extensive military presence that comes at the cost of preparations for the next war and creates internal divisions between left and right. The barrier has been built as an international border, it contains border crossings and is defensible.
The Palestinians have never actually made a choice between peace and war: they have only made a choice between war and occupation and that is not a genuinely free choice. They can only make a genuine choice for peace if the occupation (or most of it) ends first. By retaining territory Israel keeps a bargaining chip for a negotiated agreement - and all the key religious areas - but not enough territory to prevent the Palestinians from exercising a free decision over whether to sue for peace.
While a single state solution is unattainable without violence, a withdrawal under Israel's terms leaves Israel in the driving seat of the peace process at minimal social cost within Israel and significantly improves the situation of the Palestinians as the Middle East enters its new phase.
Just to reiterate, Israel withdrew from Sinai by 1979, from Southern Lebanon in 2000 and from Gaza in 2005.