Israel is literally a “Nation for Jews” in its constitution were it says roughly that all Jews and only Jews are entitled to Israeli nationality, hence why any Jewish person can just land at Tel-Aviv, ask to get Israeli nationality and get it.

That said, Israel, pretty much uniquelly in the World, separates Citizenship from Nationality and assigns different rights to both, so non-Jews can get Israeli Citizenship but not Israeli Nationality.

Limitations on the rights that people get from having Israeli Citizenship without the Nationality include, for example, limits to where they can live.

Appartheid in Israel is already officially implement, since the very beginning, so even if the Palestinians were given Israeli Citizenship (highly unlikely given Israel’s track record on this: for example tens of thousands of Arab residents in Jerusalem have for decades been refused Israeli Citizienship even though they were born there and lived there their whole lives), they would still have less rights than Israeli Jews or in fact any Jew in the world if they came to Israel.

I’m no diplomat but having the government officially annex it sure seems like an escalation. Many (most?) of those settlements are illegal even under Israeli law* so the way to legitimize them is to annex the territory, because “it doesn’t have a government now”.

* According to Wikipedia, Israel’s Supreme court has said repeatedly (until 2012 at least) that the settlements are illegal, apparently against the word of the Executive branch of the government. And then last year, this: https://en.wikipedia.org/wiki/2023_Israeli_judicial_reform