Way back when I was in uni and dinosaurs roamed the earth, I did a crappy first-year international politics course. In it, the lecturer explained that there were two two dominant theories about how states (or state-like organisations) interact. The first is realist theory, which says that states at all times act in a manner calculated to maximise their own power in relation to that of other states - a zero-sum kinda mindset. The second is rationalist theory, which says that realist theory is oversimplistic and that states can sometimes rationally cooperate to achieve mutual goals, and that win-win outcomes are possible even among rivals.
I did a semester of this and then thought to myself 'nah, those are both pants' and formulated humble minion theory, which says that states generally act in a way that benefits the individuals and organisations in power in those states. And then I went off and studied computer science and stopped faffing around with humanities subjects, but much later I found out that (like most of my good ideas) someone had already thought of this and given it a name which I have long since forgotten, but which is much less snappy than 'humble minion theory'
There's a lot of HM theory going on in the israel/palestine thing. People forget that Clinton's peace plan back in the 90s was accepted by both sides, but then both leaders who negotiated it were turned on by extremists on their own sides, and the plan sank. Rabin was murdered by a Jewish right-winger, and Hamas gleefully took the opportunity to turn on the PLO (who were in charge at the time) and become the new big cheeses in palestinian politics? I think it was GU earlier who was talking about the Israeli withdrawal from I think Hebron? Classic case. Negotiated withdrawal, prime opportunity for everyone to get what they want, and frigging Hamas invokes HM theory. They actually go on a rampage rocketing the israeli troops that are already peacefully withdrawing, just so they can claim bragging rights about 'forcing the occupiers to retreat'. Cynical, useless, scumbag act of the first order, craps on the peace process, makes israel far less likely to agree to further peaceful withdrawals, kills a bunch of innocent people - but it works, and Hamas wins the next palestinian elections and AFAIK have been in charge ever since.
Netanyahu is in a bit the same position. Settlers in the occupied territories historically tend to support the right side of israeli poitics, so purely from a self-interest point of view it makes entirely sense for a party on the right to create more settlers. And more settlers generates more violence against settlers by Hamas etc, which reduces support for negotiations. I don't think Likud etc actually think in terms quite that machiavellian when setting policy, of course, I suspect it's more of a 'only the people out here in the settlements know what these animals are really like' mindset, but the effect is the same. Not to mention that Likud hasn't (last I heard) got a parliamentary majority of their own and are reliant on the support of hardline minor parties, who oppose any sort of compromise, to stay in power. Humble minion theory in action.
Talking about 'israel did X' or 'the Palestinians believe Y' is unproductive and inaccurate. They're not monolithic organisations, each contains a whole bunch of factions interest groups, and people who disagree on the best way to go about things.