First, some conditions that need to be addressed however Israel progresses.
One, there are between 2 and 3 million Arabs living in the disputed territory east of the Armistice Line.
Two, permanently denying them a say in the state that rules them is unacceptable.
Three, forcing those Arabs to leave or conditioning their gain of political rights on their leaving is unacceptable.
Four, including those Arabs in the Israeli polity would be highly undesirable.
Five, Jordan's conquest of 5.6 million dunams in the Independence War does not create a right for a future Palestine to encompass 5.6 million dunams.
As to number four, I am aware that the Palestinian Arab population is inflated and that they may not be enough to threaten the Jewish majority of Israel if they were granted citizenship. However, that is not the only threat from including them in Israel's polity.
Consider coalition politics in Israel today. The Knesset consists of 5 major blocs: the right, the left, the center, the chareidim, and the Arabs. Due to the nature of the Arab parties that exist, a coalition requires a majority of 61 MKs that excludes the Arab parties. In the current Knesset, the Joint List holds 13 out of 120 seats, meaning that a coalition requires 61 out of 107. Thus a simple majority of the Knesset of 50 percent plus 1 is effectively a requirement for a 57 percent supermajority of Jewish-party seats. Adding 2 million Arabs to Israel's electorate could very easily swell the Arab bloc to 30 seats or more, meaning that a coalition would require 61 out of 90 or fewer seats or a two-thirds supermajority of Jewish-party seats.
Given the ability of reaching consensus demonstrated so far, that would render Israel ungovernable.
Unfortunately, there is never going to be an agreement that ends the Palestinian national movement's (PNM) claims with Israel still standing. This means that any path forward would have to consist of unilateral Israeli action.
One factor working in Israel's favor is that the bulk of the Arab population in the northern portion of the disputed territory resides either west of a line running from Route 458 southeast of Ramallah to Route 578 to the northern section of the security barrier or in the vicinity of Jericho. As such, a unilateral action could be to draw from southeast of Ramallah to the security barrier in the north roughly following Routes 458 and 578.
Where that line passes Shilo, a corridor would extend west to the security barrier along Routes 60 and 5, expanding to Route 55 west of Ariel. An additional line would be drawn along some route from the intersection of Route 5 and the security barrier to Ramallah. Inside of defined perimeters west of Routes 457/578 and either south of Route 5 or north of Route 55, Israel would evacuate the settlements and make the vacated territory Area B. Outside of those perimeters, excluding the Jericho area, and north of Maale Adumim would be annexed to Israel.
Subsequently, the PNM could be told that if they ever display actions suggesting that they would not exploit any transformation of their jurisdiction into a state in order to enhance their war-making capabilities against Israel, Israel will start the process of transitioning their jurisdiction into a state and discuss borders for the southern disputed territories. Until then, Israel will sit pat and operate in the expanded Area B as she has operated in Area B for the past two decades.
I realize that abandoning Beit El, Yizhar, and many northern settlements would be a steep price for not even a pretense of peace. However, it would also mean annexing Ariel, Shilo, Maale Adumim, and the northern Jordan Valley, an act for which Israel could not hope to gain diplomatic cover without paying a price.
One requirement to go ahead would be diplomatic cover from the U.S. to acquiesce, if not recognize, Israel's partial annexation in the north. In order to defend against a future president like Obama reneging on this acquiescence, it would be necessary for it to take the form of a treaty that would be legally enforceable against future presidents.
At a more grassroots level, withdrawing from the perimeters I described would provide a counteroffer to the notion that Jordan's conquest of 5.6 million dunams entitles the Palestinians to 5.6 million dunams. Many will complain about Israel grabbing land in giving the PNM less than that. However, unlike during Obama's reign, they would not be able to claim that Israel must withdraw from any additional territory in order to avoid becoming a binational state. Further, it would define the Palestinians' territory in a small number of contiguous areas which would remove almost any objection besides their supposed entitlement to 5.6 million dunams.