There will be no credible negotiations while Gaza is ruled by Hamas and the West Bank by Fatah. Pressuring Israel on settlements is difficult enough, since the religious/settler parties hold disproportionate sway in Israel's parliament coalition politics (due to proportional representation and other election rules). Imagine how difficult it would be to get Hamas and Fatah to share power, especially when they murdering each other.

Nasochkas, I think the idea is to do the right thing regardless of what the other guy is doing. Isn't retaliation and matching nastiness what causes the current problems?

Well I think it is in Israel's interest to take on the settler movement..not because of the I/P conflict, but for internal interests. The majority of the settlers are very orthodox, and support the rightist/religious parties. They do not have the support of the wider population. In fact, many of the families refuse to fight in the army ("religious exemption") and have as many children as possible, which are then supported by welfare payments. I just think that Israel waists a lot of money guarding the settlers, supporting their huge families, and does not even get army service in return.