What you fail to see is that the Israelis aren't arguing with the Palistinians. At any point in the last 40 years Israel could have quickly and efficiently driven all of the Palis into the sea. Israel's argument has always been with the few allies that believe in its right ot exist (forget Europe... think Britain and the US). It is an argument based on how Israel should respond to the Palis. The weak-kneed liberals in the State Dept have always asserted that Pali violence is a product of Israeli expansion, and they have used the plausibility of this to sway government and public opinion. What Sharon's actions do is remove the plausibility. When Cindy Sheehan says that the Iraq war is for oil and Haliburton, no one believes her, because simply observable facts contradict her points. Now the State Dept finds itself in the same place: they won't stop claiming that Israeli expansion is what "causes" Pali violence, but it will be as unbelievable as Cindy Sheehan.
You're mistake is in assuming that the Palis matter. They don't, and never have. No sensible Israeli gov't would take a moment to consider whether Israel's actions will reduce Pali terrorism, because nothing will. They must focus on what will give them a free hand to deal with it. That's the argument that matters, and it is the one that is being won with this move...