The Israeli construction freeze in the West Bank hangs like a dark cloud over the peace talks. The moratorium expired on 26 September and President Abbas has continuously said he will withdraw from negotiations if settlement activity resumes.

Last-ditch attempts to save the talks from an early collapse are taking place behind the scenes. Meanwhile Binyamin Netanyahu, the Israeli prime minister, has called on the settler movement to show restraint and only allow only small-scale construction to resume. Tensions remain very high.

What matters to Palestinians is not public promises but what happens on the ground. Evidence of settlement growth serves to crush hope for the Palestinians and further undermines the legitimacy of the negotiators. Palestinians and others have for many years emphasised that the settlement policy of the Israeli government has created facts on the ground, making it impossible to establish a contiguous, economically and politically viable Palestinian state without removing a significant number of settlers.

Of highest priority at the peace talks will be the need to define borders and the nature of land swaps. Previous Palestinian-Israeli negotiators have allowed for land swaps. The talks will need to clarify which settlers will be within the borders of the state of Israel and which settlers, if any, will reside in the new state of Palestine. This will provide more clarity on the number of settlers who need to be relocated.

If there were success in drawing the geographical line, this would divide legal settlements within Israel from settlements that are going to be handed back to Palestinian control. That would involve between 60,000 and 90,000 people giving up their claims to be living in the historical land of Israel. Without a great deal of choreography and sequencing, the current Israeli coalition is likely to split as the balance of power is held by the settler movement. A possible alternative is that it could lead to a new alliance between the Kadima party and Likud.

The public image of the settlers is one of belligerent, hill-top youth and rightwing ideologues who are vociferous opponents of withdrawal, claiming an ideological attachment to the land, placed in settlements by the Israeli government to ensure the creeping annexation of the West Bank and the impossibility of a two-state solution.

Contrary to public perception, the settler issue is much more complex and diverse than is normally assumed. Settlers range from secular quality-of-life settlers – particularly those east of the barrier who now seek to return to Israel – to national religious settlers who have become increasingly embattled, outspoken and active. This hardcore of national religious settlers would not co-operate with evacuation and may regard withdrawal as an act of treason. Of the total 289,600 settlers (excluding settlers in East Jerusalem), assessments suggest that 40% are ideological, 29% ultra-orthodox and 20% secular.

Almost a third of settlers are ultra-orthodox Jews, many of whom reject or are indifferent to Zionism, and who have been attracted to the West Bank because of the availability of low-cost housing for very large families. Such communities, combined with the secular groups, could be tempted back to Israel if the financial incentives were generous.

A recent report by the Oxford Research Group (ORG) conducted a number of qualitative interviews with settler leaders, with the aim of coming up with new and fresh thinking. The report by ORG – "Pariahs to pioneers: could the settler movement be part of the solution and not part of the problem in the resolution of the Palestinian-Israeli conflict?" – suggests the possibility (counterintuitive at first glance) that the settlers, seen as "pariahs" by some, can become the next generation of "pioneers" who forge the infrastructure of Israel's future.

So what would this take? Part of the story of the disengagement from Gaza is that communities were broken up and many still remain homeless. In order not to repeat this, a deep consultation process is needed for the planning of new settlements within 1967 borders. Respect needs to be given to the communities in terms of their existing networks, so that communities with all their strong connections are not broken up and religious leaders, teachers, doctors etc are part of a continued social cohesion.

The international community could use discreet diplomacy and work quietly behind the scenes with the Israeli government to prepare the settlers to relocate. This can be done with the financial incentives and practical help, as appropriate with the setting up of a transitional peace fund.

Any international effort for settler relocation would need to be seen as part of a bigger picture in which the question of the Palestinian refugees would be addressed with generous compensation, full rehabilitation and training. An "international mechanism" would need to be established after a final status agreement to distribute compensation.

For those settlers who do not accept compensation and wish to remain in the new Palestinian state, a number of options could be explored about their status. Salam Fayyad, the Palestinian prime minister, remarked in 2009 that settlers are welcome to stay in a future Palestinian state. It could then be assessed how realistic it is for some Israelis to reside in a new state of Palestine with the possibility of dual citizenship, which could also be reciprocated to the Palestinian citizens of Israel.

Creative new thinking is now needed here, which opens up ideas in terms of citizenship. The plan is that the talks will be concluded within a year, but there are suggestions that the agreement will be implemented over a decade. There are conflicting messages coming from Hamas at this point, with the military wing having shot dead four settlers, and claiming them to be legitimate targets, and other voices within Hamas who have said off the record that in any long-term truce the settlers could move over a 10-year period.

Our natural instincts are to vilify groups who do not think like us or sit within our comfort zone, and for some the settler movement fits into this category. The challenge is to construct incentives that address legitimate concerns of these communities and that would make the majority of the settlers feel they were enhancing the security of Israel by returning within 1967 borders. Without the momentum that relocates Israeli settlers, the dream of a Palestinian state will remain elusive and we will see ever-escalating violence in the region.