SO.. now what? What does this mean?
Barak Ravid over at Haaretz has a comprehensive and quick explanation for all of this. I recommend reading it
What decision also means is now that the Palestinians can be internationally considered at the State level, they will also have responsibilities towards not only their neighbors towards their own populace. For them, this is a double edged sword. One reason is due to the fact that as of late the Green Flag of Hamas has been seen flying more often in the West Bank, and a Hamas run Palestinian State will not generate nearly the support that a Palestinian Authority / PLO state will.
Another important aspect of this is that now as a State actor they will have responsibility for the Palestinian "Refugees" of the 1948 war. Will they turn their back on the people that the U.N. considers refugees? Will they now offer a home to the Palestinians in Jordan, The Gulf, or Lebanon who want to live in the State of Palestine? No one really knows. But again that presents a thorny issue. The PLO has long claimed to speak for the "refugees" will they continue that or will it be the Government of Palestine. This gets even more complicated if Hamas happens to win the next Palestinian elections (whenever they may be). The Palestinians will have to further establish this important piece of the puzzle.
But for the situation "on the ground" to change there have to be direct negotiations around the borders. As it stands now, nothing of the borders has been decided. To ask the Israelis to give up the Kotel and the Jewish Quarter of Jerusalem simply isn't plausible. At the very minimum for there ever to peace this must be respected. In all reality the Israelis probably would not give up any part of Jerusalem, however, this has not been fully or seriously tested. One also would be talking about giving up the neighborhoods around East Jerusalem and the corridor up to Mt. Scopus. Again, that is pretty much something I can't see the Israelis ever budging on and in fact, from news of today: 3,000 new homes have approved beyond the Green Line which would seem to indicate that this version of the Israeli Government is not only going to not honor the Palestinian claims but will continue to build across the Green Line.
On the other side of the "ball" (so to speak) - there are some positives. The first and foremost is that this puts the Two State Solution back on the table Front AND Center. While Israel can ignore this for a while longer they cannot and should not ignore for any long period of time. I can understand with the chaos in the Palestinian polity why the Israelis would not address this, but, at some point in the very near future they will have to address it. There simply is too much at stake to, (as Mitt Romney suggested they do) "kick the can down the road".
This decision will also put pressure on the upcoming Israeli elections. As we all know, Israel's leading party, (and likely future head of the government) Likud took a hard right turn in the recent Likud primary. By moving people like Moshe Feiglin, and Danny Danon up, the Likud is seemingly committing itself to further occupation and eventual declaration of something approaching annexation of the West Bank (advocated by Danon and the YESHA). These maximalist efforts will most likely run into opposition from the Quartet and eventually the U.S. government particularly as it tries to build an alliance with Arab States against Iranian hegemonistic interests.
In the effort against spreading Iranian influence (including their arming of Hamas), the U.S. will most likely find it more difficult gaining influence in the Arab nations if the Israelis are actively settling the beyond the Green Line and not declaring any final borders. Israel simply needs to figure out the borders that they are willing to negotiate around. If it is the entire West Bank, then they are going to face serious problems from their neighboring states (who already don't like them), and the Western Nations (including the U.S). that are committed to the Two State Solution. Of course, this is to say nothing of the problems that they will face with demographic issues and challenges to their democracy.
So Israel has to ask itself... can it really afford to piss off the United States and Western Europe particularly as those nations gear up to dealing with Iran and the real challenges that Iran is going to present to the region and to U.S. interests. Now, while this may not be a problem going forward with the U.S. (though I think it will and I understand completely why) it will be one with the European Nations.
I believe that this event will mark the beginning of a process (that may take years to complete) that will eventually lead to a resolution of the Israeli - Palestinian conflict (note that I do not say the Arab-Israeli conflict). I have no idea what this resolution will be and whether it will lead to Peace of not. There are too many "moving pieces" and both the international economic or environmental climate will have effects. But... all in all I believe it is the beginning of the "endgame" for both sides. Unfortunately, like the participants in this, I have no idea where it will end up.