Israel has long supported a state for Palestinians OUTSIDE of Israel, it was always the Pallies who rejected the responsibility of actual governance
Areas A, B and C are outside of Israel proper ...
West Bank Areas in the Oslo II Accord
http://en.wikipedia.org/wiki/West_Bank_Areas_in_the_Oslo_II_Accord
The Oslo II Accord divided the West Bank into three administrative divisions: the Areas A, B and C. The distinct areas were given a different status, according to the amount of self-government the Palestinians would have over it through the Palestinian Authority, until a final status accord would be established.
Oslo II Accord
http://en.wikipedia.org/wiki/Oslo_II_Accord
The Interim Agreement on the West Bank and the Gaza Strip commonly known as Oslo II or Oslo 2, was a key and complex agreement in the Israeli–Palestinian Peace process. Because Oslo II was signed in Taba, it is sometimes called the Taba Agreement.
The Oslo Accords envisioned the establishment of a Palestinian interim self-government in the Palestinian territories, but fell short of the promise of an independent Palestinian state. Oslo II created the Areas A, B and C in the West Bank. The Palestinian Authority was given some limited powers and responsibilities in the Areas A and B and a prospect of negotiations on a final settlement based on Security Council Resolutions 242 and 338. The Accord was officially signed on 28 September 1995.