Israel expects others to recognize its right to exist, which would be reasonable if Israel were a reasonable state which was prepared to live in peace with its neighbors. The problem with trying to "legalize" the settlements is that this implicitly puts Israeli law above international law. This weakening of international law weakens the very basis of the existence of Israel itself. Similar things happen with individual humans. When someone does not recognize the property rights of others, perhaps by stealing, their own property and or liberty may be put in jeopardy by the law. Similarly if they do not recognize the right to life of others, perhaps by committing murder, their own right to life may be put in question. If Israel wishes its existence to be recognized by others, and this seems a reasonable part of a peaceful settlement in the region, it must first recognize itself. This means recognizing the limitations on its own freedom of action.
Western-backed Syrian rebels say kill foreign Islamic State (Reuters)
from the article: Israel hints it may retroactively legalize settlement construction