Israelis should be allowed to settle anywhere they like in Palestinian territories under Palestinian laws, as well as Palestinians should be allowed to settle anywhere they like in Israel under Israeli laws. Such laws can be negotiated between the two states' authorities through bilateral agreements, i.e. resident permits, right to purchase property or not, under what conditions, after how much time, how and where to pay taxes, etc. That's how it works in the rest of the world.
Police arrest 18-year-old Palestinian suspected in Old City stabbing (Haaretz)
from the article: Barak to Haaretz: Israel ready to cede parts of Jerusalem in peace deal