I agree. Break the stalemate. Declare a state already. The settlements will be on land claimed by another state instead of being disputed. (yes it is disputed. there are international opinions that Israel can't legally build settlements, but the land doesn't actually belong to any state. there is little argument there) I think this is the right way to go... The Palestinian state will probably be immediately recognized in the UN with provisional borders based on 1967 lines. Then you can start discussions between two states - Israel and Palestine over the more mundane questions of borders and economic arrangements as opposed to the current intractable historical discussions between a state and a stateless ethnic group.
Egypt to hold parliamentary election in 2 phases starting Oct 18-19 (Reuters)
from the article: Arab League may bring settlement freeze debate to UN