What better way to give his extremist population the green light to extend the occupation then to feel he is justified in telling the rest of the world that the Palestinians do not want peace. If the Palestinians had a state in the West Bank the Gazans could have chosen whether to seek similar or to continue to support the rejectionist wing that seeks Israel's destruction. Bibi is determined that does not happen - his vision would not work if the Gazans actually chose peace over war - so he can brand the Palestinians as terrorists and continue to further his dream of building a Greater Israel on all or a large part of the West Bank. This sounds like a Machiavellian plot, regrettably Bibi is devious enough to be seen as a modern day Machiavelli.
Law expanding definition of terrorist activity passes first Knesset reading (Haaretz)
from the article: LIVE BLOG: Day 1 of Israel-Gaza conflict 2012