Good, thoughtful answer. A few comments:

Don't hold your breath on Israel closing down settlements. Heck, if we could get a moratorium on new ones or expanding old ones, it would be a miracle all by itself.

...Now, recognizing that the Palestinians don't have the control over their radical factions the Israelis have over their army, there are bound to be more terrorist actions.

Actually, the current evidence points to an iron-solid chain of command from Arafat and his people all the way down to the guy wearing the bomb. I agree, though, that even should Arafat suddenly decide to stop all terrorism, there would probably still be splinter groups going ahead on their own.

The key is how the Palestinians respond to this. The Palestinians must be seen that it is in their best interests these do not occur, and if they do they are crimes against the Palestinians as well as the Israelis, and treated accordingly. Anyone sponsoring terrorism would be captured and tried. Period. If not, the process is over.

As I recall, this is what was supposed to happen in the LAST deal. The Palestinian authorities, rather than cracking down on terrorism, were co-opted into the terrorist movement. You are correct that a Palestinian police force would have to really go after terrorists to obtain any sort of credibility.

What is jeopardized for the Palestinians would be the so far unmentioned "carrot". A part of the peace settlement would be economic aid in the form of developing schools and jobs within Palestine so as to give the majority a reasonable hope of an improving economic situation, something they don't have now. Continuing terrorist actions without porompt and effective action by the Palestinians against the perpetrators would end the economic aid, and restore the Israeli military occupation. Hopefully, terrorism would then be seen as a bad thing by the majority of Palestinians, too.

Unfortunately, I have seen zero evidence that the current Palestinian leadership, despite lip service, has any real interest in improving the lot of the average Palestinian. They, and a lot of other totalitarian leaders in the Arab world--and elsewhere--could care less about whether their people are eating their own shoes, as long as the leaders get what they need.

I assume the average Palestinian, like almost everyone else on the planet, mostly just wants a peaceful, stable life where they can simply work, live, and raise kids without fear. It seems these Palestinians don't have a lot of say in the current situation. Such people, sadly, rarely do in world politics.