How Not To Occupy, A Primer:
... at the end of the [1967] conflict, Israel unexpectedly found itself in control of some one million Palestinians, with no definite idea about their future status and lacking any concrete policy for their administration. In the wake of the war, the only objective adopted by then-Minister of Defense Moshe Dayan was to preserve normalcy in the territories through a mixture of economic inducements and a minimum of Israeli intervention. The idea was that the local populace would be given the freedom to administer itself as it wished, and would be able to maintain regular contact with the Arab world via the Jordan River bridges. In sharp contrast with, for example, the U.S. occupation of postwar Japan, which saw a general censorship of all Japanese media and a comprehensive revision of school curricula [positive example], Israel made no attempt to reshape Palestinian culture. It limited its oversight of the Arabic press in the territories to military and security matters, and allowed the continued use in local schools of Jordanian textbooks filled with vile anti-Semitic and anti-Israel propaganda [negative example].
Israel's restraint in this sphere ... turned out to be desperately misguided.
...Indeed, even as the PLO (until 1982 headquartered in Lebanon and thereafter in Tunisia) proclaimed its ongoing commitment to the destruction of the Jewish state, the Israelis did surprisingly little to limit its political influence in the territories. The publication of pro-PLO editorials was permitted in the local press, and anti-Israel activities by PLO supporters were tolerated so long as they did not involve overt incitements to violence. Israel also allowed the free flow of PLO-controlled funds, a policy justified by Minister of Defense Ezer Weizmann in 1978 in these (deluded) words: "It does not matter that they get money from the PLO, as long as they don't build arms factories with it." Nor, with very few exceptions, did Israel encourage the formation of Palestinian political institutions that might serve as a counterweight to the PLO. As a result, the PLO gradually established itself as the predominant force in the territories, relegating the pragmatic traditional leadership to the fringes of the political system.*
Given the extreme and even self-destructive leniency of Israel's administrative policies, what seems remarkable is that it took as long as it did for the PLO to entice the residents of the West Bank and Gaza into a popular struggle against the Jewish state.
...had Israel prevented the spread of the PLO's influence in the territories, a local leadership, better attuned to the real interests and desires of the people and more amenable to peaceful coexistence with Israel, might have emerged.