This article in Ha'aretz is a detailed look at the effect that the settlements have had on strangling the prospects for the Two State solution:
Israeli construction in the West Bank in general and in the area of Jerusalem in particular would leave the Palestinians with chances for a "state" in name only, that would more closely resemble an Indian reservation in the United States, with limited access to water and land. This is the opinion of the document's authors - a team of legal scholars, academics and geographers who have been working in the framework of what is called the "Jerusalem task force" for the past two years.
Israel has exploited the opportunity afforded by the conflict to expand in three directions, through its construction and settlement policies in Jerusalem. These trends originated long before the outbreak of the intifada: closing off East Jerusalem from the rest of the West Bank; for all intents and purposes cutting off the northern West Bank from the southern West Bank; and the prevention of any opportunity for Palestinian urban development, partly by means of expanding construction in the settlements of the West Bank in general, and in Jerusalem in particular.
The longstanding Israeli policy of discrimination on the allocation of budgets and land reserves is turning the Palestinian territory in Jerusalem proper into slums that are isolated from one another, states the chapter about the implications of Israeli construction in East Jerusalem for the Palestinian population. These slums are denied open land tracts for future population growth and economic and commercial growth.
The document predicts an exacerbation of population density in these slums, which will be fertile ground for poverty and disease. The Israeli construction policies in Jerusalem and in the northern and southern West Bank, spoils any possibility of leaving Jerusalem as an open city shared by two peoples and two states. The document concludes by cautioning that unless Israel leaves territorial continuity in the Palestinians' hands, "the only remaining option is for the Palestinians to accept a one-state, two nations solution." However, this will not be accepted by Israel because of Palestinian demographic superiority that threatens the Jewish state, say the authors of the document.
I think this is a good thing. The Israeili policy has been designed for a one-state solution all along - but that state has been designed to be Jewish, ane xtension of the current Israel to all of the territory. However, by pursuing that plan, and making it impossible for the Palestinians to establish any kind of territorial continuity or sovereignity, they are actually suceeding too well. The result will be a one state solution, but the Palestinians have been ignred in the equation. The truth is that transfer is untenable (imagine the symbolic shock, of long lines of people with bar codes on foreheads being herded into railroad cars, to the Israeili psyche).
While the Israeilis are creating "facts on the ground" with construction and land appropriation, the Palestinians are creating facts on teh ground with simple population. The eventual result will be that a one state solution is inevitable.