Formally re-occupying the territories for the long-term under direct Israeli military rule would definitely not be a feasible solution.
I am sure that the Sharon government would realistically be happy if: Arafat and the PA would truely act the proxy police force of Israeli occupation; allow all of the settlements to remain with extra land for infinite expansions of, at least, existing settlements; accept Jerusalem as the undivided capital of Israel; accept that there will not only not be a 'right of return', but that Israel will take no responsibility whatsoever, even verbally for the exodus of Palestinians in 48 or 67; accept that 70% of the water resourses over the green line (in WB or Gaza) would be used by Israel and not the Palestinians; accept that all exports and imports will go through Israeli customs...and we could go on and on with this.
And this line is really no different for the Barak government's offer.
As quoted from an article from Yidiot Aharont a couple of months back:
"The only clear element of Barak's plan in Camp David was the immediate annexation by Israel of about 10 percent of the West Bank land. These include the settlement blocks which are close to the center of Israel and in which there are already over 150,000 Israeli settlers. But the bigger fraud of Barak's plan, which has not received any attention in the public debate, is the fate of the rest of the 90 percent which were supposedly designated to belong to the "Palestinian state". The situation in these areas is easily visible today: These lands are cut up by 37 isolated settlements which were purposely build in the midst of the Palestinian population to enable future Israeli control also of these areas. As a result, 2 million Palestinians are crowded in enclaves which consist of about 50 percents of the West Bank, and the other 40 percents are blocked by the defense array of some 40,000 settlers. As always, inofficial rumors were spread in the media that Israel intends to evacuate these areas in some future. But all relevant government offices clarified repeatedly that no plan is being prepared for the evacuation of even a single settlement. First, the Palestinians need to prove that our imposed arrangements work, and then we will of course discuss and consider."
So the question is, knowing that the Palestinians would not ever accept this, and knowing that the PNA could not enforce, for Israel, these demands, even if it truely wanted to, and knowing that the Israeli leaders know this to be the case, what is the only direction towards a solution possible?
A continuation of total lockdown (as you said) with the ever-increasing severity of periodic 'retaliatory' incursions, 'collateral damage' deaths and assasinations of Palestinian secular and religious leaders, leading to an exodus of those Palestinians who have the ability to go elsewhere and all the time 'showing' the world how many openings for peace we are trying to make while keeping the blame on Arafat and the Palestinian Authority though media campaigns, both for our attacks and theirs. This will eventually, hopefully (in their logic not mine) lead to either a civil war, the assasination of Arafat by Hamas or another wing of Palestinian militants, or a large enough death toll from an attack on Israeli civilians that Israel would get the 'green light' (if only for a small window of time) for an all out removal of the PA, etc. Actually, the assasination of Arafat by Hamas or something would lead to some level of civil war anyway. So either way, I am guessing, it is hoped that there will come a point when there will be a 'justification' for an all out attack on either the PA or whatever powers temporarily vye for control if internal Palestinian conflict opens into the light of day.
Then Israel will go in, have a temporary full military re-occupation, mass exodus of even more Palestinians, and after a time period of full occupation along with a huge world media campaign along the lines of: 'see, we tried to make peace, make concessions, give them all we could give and now the world will know for evermore that it is impossible for the Palestinians to have full sovereignty. We will call for regulated local elections, give them as much civil autonomy as possible with their own schools, own mayors, etc. but they must be unarmed', etc. and occupation will continue under another evolved form.
This, or Israel is hoping that things will get bad enough (as if they aren't already) that the International community will 'force' a solution on both camps, knowing that the enforced comprimise by both sides will still put Israel in a better situation than was the best scenario under Oslo.
In reality, who knows what IS going to happen. We only know that the Israeli gov IS purposefully provoking terrorist attacks, as stated in the Yideot Aharonot article, by security analyst Alex Fishman (I sent the article to the LBO list Dec. 4 "A dangerous Liquidation" and it is also at: http://www.indymedia.org.il/imc/israel/webcast/10855.html)
Recently I wrote to a somewhat well known Mid-East journalist I know, to ask if he was writing an article on the present situation (I wanted to put a link to it, if so, for the center column feature I did for IMC-Central www.indymedia.org on Dec. 4). Anyway, he said no, he was going to wait the situation out a little while because, I quote: "prophecying post factum is always safer". Very true.
Anyway, I stuck my head out here for you by prophecying the old fashioned way.