The term Settlements usually refers to the towns and villages that Jews have established in Judea and Samaria (the West Bank) and the Gaza Strip since Israel captured the area in the Six-Day War of 1967. In many cases, the settlements are in the same area which flourishing Jewish communities have lived for thousands of years.
Following Israel's resounding defeat of the invading Arab armies in the Six-Day War, strategic concerns led both of Israel's major political parties - the Labor and Likud - to support and establish settlements at various times. The first settlements were built by Labor governments from 1968 to 1977, with the explicit objective to secure a Jewish majority in key strategic regions of the West Bank - such as the Tel Aviv-Jerusalem corridor - that were the scene of heavy fighting in several of the Arab-Israeli wars.
The second wave of settlement construction began with the1968 occupation of the Park Hotel in Hebron, a city with a long, rich Jewish history dating back to biblical times that had only been interrupted by a massacre of Jewish residents by Arabs in 1929. Those who came to Hebron in 1968 were the first of the ideological settlers who believed that Israel's victory the prior year was an act of G-d which indicated divine providence that the historic Land of Israel should be restored to the Jewish people. Very few such settlements were established until Menachem Begin was elected Prime Minister of Israel in 1977. Begin's government, as well assubsequent Likud-led governments, provided financial incentives for Jews to move to parts of Judea and Samaria that did not necessarily have any strategic value. Their purpose was to solidify Israel's hold on territory that was part of biblical and historical Israel and preempt the creation of a Palestinian state.
A third group of Jews who are today considered "settlers," moved to the West Bank primarily for economic reasons; that is, the government provided financial incentives to live there, and the towns were close to their jobs.
As of July 2012, the estimated Jewish population of the nearly 130 officially recognized West Bank settlements was 350,150. Critics suggest these figures imply territorial compromise with the Palestinians is impossible; however, the distribution of the Jewish population is such that a solution is not only conceivable but also very plausible and practical.
When Arab-Israeli peace talks began in late 1991, more than 80 percent of the West Bank contained no settlements or only sparsely populated ones. Currently, more than 60 percent of Israelis living in the West Bank live in just five settlement blocs - Ma’ale Adumim, Modiin Ilit, Ariel, Gush Etzion, Givat Ze’ev - which all lie within only a few miles of the 1967 border, otherwise known as the "Green Line." These settlement blocs could be brought within Israel's borders so as to retain an Arab population (from the West Bank) of less than 50,000. It is inconceivable that Israel would evacuate large cities such as Ma’ale Adumim, with a population of approximately 35,000, even after a peace agreement with the Palestinians, and even Yasser Arafat grudgingly accepted at Camp David the idea that the large settelement blocs would be part of Israel.
The area in dispute is also very small. According to one organization critical of settlements, the built-up areas constitute only 1.7% of the West Bank. That is less than 40 square miles. Even if you add the unbuilt areas falling with the municipal boundaries of the settlements, the total area is only 152 square miles.
Another charge is that settlements are illegal. The United States has never adopted this position and legal scholars have noted that a country acting in self-defense may seize and occupy territory when necessary to protect itself. Moreover, the occupying power may require, as a condition for its withdrawal, security measures designed to ensure its citizens are not menaced again from that territory.
According to Eugene Rostow, a former Undersecretary of State for Political Affairs in the Johnson Administration, Resolution 242 gives Israel a legal right to be in the West Bank. The resolution allows Israel to administer the territories it won in 1967 until 'a just and lasting peace in the Middle East' is achieved, Rostow wrote in The New Republic (10/21/91). During the debate on the resolution, he added, speaker after speaker made it clear that Israel was not to be forced back to the 'fragile' and 'vulnerable'  Armistice Demarcation Lines.
Israel's adversaries, and even some friends, assert that settlements are an obstacle to peace. The evidence points to the opposite conclusion. From 1949-67, when Jews were forbidden to live on the West Bank, the Arabs refused to make peace with Israel. From 1967-77, the Labor Party established only a few strategic settlements in the territories, yet the Arabs showed no interest in making peace with Israel. In 1977, months after a Likud government committed to greater settlement activity took power, Egyptian President Anwar Sadat went to Jerusalem. One year later, Israel froze settlements, hoping the gesture would entice other Arabs to join the Camp David peace process. But none would. In another Camp David summit in 2000, Ehud Barak offered to dismantle most settlements and create a Palestinian state in exchange for peace, and Yasser Arafat rejected the plan.
Israel also proved willing to dismantle settlements in the interest of peace. During the Camp David negotiations with Egypt, all of the issues had been resolved, but one remained, Sadat's insistence that all settlements in the Sinai be removed. Begin didn't want to remove them, but he called Ariel Sharon for advice. Sharon said that in the interest of peace, the settlements should be dismantled. Israel did just that in 1982, providing compensation to residents for the loss of their homes, farms and businesses that ranged from $100,000 to $500,000 (Jerusalem Post, January 8, 2004). Nevertheless, a small group of settlers in the town of Yamit refused to leave and Sharon had the army literally drag them out of their homes to comply with the terms of the agreement with Egypt.
In short, the historical record shows that with the exception of Egypt, and Jordan, the Arab states and Palestinians have been intransigent regardless of the scope of settlement activity. One reason is the conviction that time is on their side. References are frequently made in Arabic writings to how long it took to expel the Crusaders and how it might take a similar length of time to do the same to the Zionists.
Settlement activity may be a stimulus to peace because it forces Arabs to question this tenet. The Palestinians now realize, said Bethlehem Mayor Elias Freij, a member of the Palestinian delegation to the Madrid talks, that time is now on the side of Israel, which can build settlements and create facts, and that the only way out of this dilemma is face-to-face negotiations. Consequently, the Arabs went to Madrid and Washington for peace talks despite continued settlement activity. Similarly, the Palestinians negotiated with Prime Minister Yitzhak Rabin, even though he also allowed the number of settlers to grow.
The implication of many settlement critics is that it would be better for peace if the West Bank were Judenrein. It would certainly be called racist if Jews were barred from living in New York, Paris or London; barring them from living in the West Bank, the cradle of Jewish civilization, would be no less objectionable.
On the other hand, though Jews may have the right to live in the territories, it still might not be to Israel's advantage for them to do so. Settlements create serious security concerns for Israel, requiring the deployment of forces to protect Jews living in communities outside the boundaries of the state and diverting resources that might otherwise be used to prepare the military for possible conflicts with enemy armies. The settlements also have had a budgetary impact as hundreds of millions of dollars are spent each year on infrastructure, incentives, and other material needs for Jews living in these communities. Many Israelis believe that the military and economic cost is not justified and support the removal of some settlements. Those closest to the 1967 border, and especially those surrounding Jerusalem, however, are generally regarded as justified on a variety of grounds and are likely to be incorporated within the ultimate boundary of Israel.
Israelis also increasingly believe the Palestinians may be correct about time being on their side. If Israel were to annex the territories, it would face a dilemma that no official has yet solved, and that is how Israel could remain both a Jewish and democratic state. Though some Jews on the right of the political spectrum hold out hope of a dramatic demographic shift as a result of immigration, most projections foresee an exponential increase in the population of Arabs in Israel and the territories. According to Arnon Soffer, Israel's most prominent demographer, 6,300,000 Jews are expected to live in Israel, the West Bank, and Gaza combined while the Palestinian population would be 8,740,000. If these Palestinians all had the right to vote in a "Greater Israel," Israel could not maintain its Jewish character, and if they were denied the right to vote, Israel would no longer be a democracy (Forward, January 9, 2004). This is why no Israeli prime minister, even those believed to support "Greater Israel," was ever prepared to annex the territories, and why most Israelis, including Prime Minister Sharon, have favored trading land for peace and security.
When he presented the Interim Agreement (Oslo 2) before the Knesset on October 5, 1995, Prime Minister Rabin stated, I wish to remind you, we made a commitment...to the Knesset not to uproot any settlement in the framework of the Interim Agreement, nor to freeze construction and natural growth. Neither the Declaration of Principles of September 13, 1993, nor the Interim Agreement contains any provisions prohibiting or restricting the establishment or expansion of Jewish communities in the West Bank or Gaza Strip. While a clause in the accords prohibits changing the status of the territories, it was intended to ensure only that neither side would take unilateral measures to alter the legal status of the areas (such as annexation or declaration of statehood).
According to the road map for peace, Israel is supposed to freeze settlement activity and remove illegal outposts. Israel has been removing illegal outposts, but has not been willing to implement the freeze because the Palestinians have failed to fulfill their commitments to stop the violence.
In August 2005, Israel evacuated all the settlements in the Gaza Strip and four in the West Bank under the disengagement plan initiated by Prime Minister Sharon. This was a dramatic shift in policy by a man considered one of the fathers of the settler movement. Sharon has also said that Israel will not keep all the settlements in the West Bank
Israel gave up all the territory it held in Gaza and evacuated some West Bank settlements without any agreement from the Palestinians, who now have complete authority over their population within Gaza. This offered the Palestinians an opportunity to prove that if Israel made territorial concessions, they would be prepared to coexist with their neighbor and to build a state of their own. Instead of trading land for peace, however, Israel exchanged territory for terror. Hamas came to power in the Palestinian Authority and instead of using the opportunity to build the infrastructure for statehood, the Gaza Strip became a scene of chaos as rival Palestinian factions vied for power. Terrorism from Gaza also continued unabated and Israeli towns have been repeatedly hit by rockets fired from the area Israel evacuated.
Sources: Anthony Cordesman, "From Peace to War: Land for Peace or Settlements for War," (DC: Center for Strategic and International Studies, August 15, 2003), pp. 17-21.
B'tselem, July 11, 2009; Israeli Central Bureau of Statistics