This would be ruinous for the Palestinians and they know it. Israel would lose all its obligations as occupying power, without having to give up the land. And what would the "state" live off? Ariel sits on top of their water. Most of the good agricultural land is close to the green line or in the Jordan valley. Also - the hidden detail : Half the land in east jerusalem is owned by West Bankers. The existence of such a Palestinian "state" will mean the provisions of the "absentee property" law are triggered and all their land gets taken.
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Trump: Iran deal is a disgrace and embarrassment to this country (Haaretz)
from the article: Netanyahu amenable to Palestinian state within temporary borders