What is inflaming the situation is the Palestinians refusal to recognize Israel’s right to exist, and refusal to abandon their objective of driving the Jews from the Middle East.
When you state that “Putting "settlements" in this area is not like like settling an area previously sparsely populated only by hunting and gathering peoples…practically there is a world of difference.”, you are failing to recognize that the majority of the “settlers” live in what are essentially suburbs of major Israeli cities. Israel has already agreed to negotiate the status of the settlements.
“Morally, you are right --there is no difference…” Consider the Palestinian position from a moral perspective, under no circumstance will a Jew be allowed to live in territory under their control, they must leave. There were no settlements prior to 1967, the Arab states did not want peace. There were settlements in the Sinai. When peace was struck with Egypt, they were removed (per the negotiated settlement, not terrorism). Israel stopped building for a period of months to attempt to bring into the peace process. No one came. When peace was made with Jordan, settlements weren’t an issue.
I don’t think the settlements were the problem standing in the way of peace in the past, and I don’t think they are now. When offered a settlement returning 95% to 98% of the West Bank and Gaza to the Palestinian Authority, it was turned down. Over 70% of the Palestinian population would not accept a Palestinian encompassing 100% of the West Bank, Gaza, and even Jerusalem. That is not their objective. They began the current Infitada instead. At the core of the problem is the Palestinian’s refusal to acknowledge Israel’s right to exist. If Israel abandoned all the settlements tomorrow, the situation on the ground would be the same. I certainly hope Israel doesn’t lose your support.
The problem is what to do. Other than eliminating the Arabs you will have to find a solution. One would be to abandon the "settlements" and draw Israel's borders such that they can be defended solely by Israel. IMHO Israel, AIPAC and other supporters are in the early phases of losing US public support for the current situation. A younger generation of American politicians is unlikely to give the same arms and money as in the past. A further problem is that almost 20% of the populatin of Israel is Arab. They have a higher birth rate than the Jews. How loyal these Arabs are to Israel and how loyal to Israel they will be in the future is unknown to me; however, as things now stand, the loyalty would seemingly be shallow to non-existent. Time is not on Israel's side: the longer the solution is postponed the worst the conclusion.