If it is occupied territory then the settlements are illegal. However if it is Israeli territory then in order to avoid really becoming an apartheid state (as opposed to just being accused of being one) then the Palestinians will have to be given citizenship. And if they are given citizenship, Israel will very shortly no longer be a Jewish state. Greater Israel, demoocratic, Jewish. Pick two.
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from the article: Netanyahu-appointed panel: Israel isn't an occupying force in West Bank