In my quest to expand my understanding of the Middle East, I was hoping that someone with a bit more knowledge about the whole situation could explain something to me.

The proposal is for two states, back to the 1967 armistice lines, correct?

Where I get confused is this. At the moment Israel (excluding the Palestinian territories) has about 12% Arab Muslim population. However the proposed Palestinian State (comprised of the West Bank and Gaza) is expected to be Jew free. This is the reason Palestinian Arabs are complaining so much about Jewish settlements in what they want as their land, if I understand it correctly.

Can someone explain why this is the case? Surely if Israel can have a Muslim Arab minority, why can't the Palestinian state have a Jewish minority? Why do settlements have to be such an issue?

This isn't meant to be a politically loaded question, I really am confused as to why there is two standards at work here. Hopefully someone can enlighten me.

Thanks.

I can't explain the reasons, but, I do believe a one state solution would be best. Palestinians and Israelis living together in peace. Can't see it happening though

This is a normal question. Situation here is what is not normal.
Just as lots of Israeli Arabs, even those who describe them-self as Palestinians, want to stay in Israel and protest any attempts of certain Israelis to suggest population/land exchange - same is with majority of Jewish settlers. For economical, political and historical reasons.
Then there is racism in Palestinian authority. All people who bash Israel and compare it to Nazi Germany do not notice - or do not want to - what goes on in autonomy. It is punishable by death to sell land to Jew. Not Israeli - Jew. People in Palestinian security forces were involved in numerous incidents involving shooting at settler's cars and killing. What Jewish person in his right mind would like to be a citizen in state with this background?
Add to it what Rook1545 said. A lot - not majority but a lot - of settlers are pretty extreme in their views. Concerning Palestinians, greater Israel, Jordan and Middle East in general. Even if Palestinian authority would treat Jews with silk gloves (and they will not) - some Jews would constantly push it to more violent measures and then conflict between Palestine and Israel would again be ignited.
And of course there is usual "who gets more land". Every side tries to pull the blanket on its side and land is not being made anymore, to rephrase someone.

Its all about defining how far colonization can push on both sides. Imagine the united states having kept borders defined for the native americans. It would have helped, hypothetically, solve expansionary desputes in a legal fashion, rather than the current method of whose guns are bigger.

The plo and the arab refugees living in the squalor along the border of Israel have done nothing remotely worth giving them a country. In point of fact they seem to have gone out of their way to do everything they can to show that they are undeserving of attaining that status. For that matter at one time Israel offered the plo leader y. araffat the west bank, gaza, control of the majority of the holy sites and half of Jer. as a peace offer. He rejected it!!!!!...

The so called Pals do not deserve a country,or for that matter to even be reconized as a seperate people. They are Arabs that have been kicked out of Jordan, Iraq, syria and other mid east countries because they were not wanted. the above named countries use them as a terrorist arm and lever to push their anti Israeli sentiments.
As far as I am concerned Israel should flatten the place, send the pals packing to where they came from and then spend the next couple of years making of the area what they have done in Israel proper. A vibrant, growing area populated by hard working people rather than the middle east scum who's only goal in life is to destroy Israel and let the rest of the world feed them.

So they (Palestinians) are asking for forced segregation? Hmmm...sounds peaceful. Wow folks have to keep learning and learning and learning again.