New "Peace" Plan?

A report from Reuters is saying that there is talk of a new "peace" plan between Israel and the Palestinians. The main points are that Israel would withdraw from all of Gaza and 89% of the West Bank, with the major settlement blocs being retained by Israel. Its unclear if this would mean the creation of another Palestinian state or "custodianship" of those territories by the US, Jordan and Egypt. This seems like a terrible idea. It would be rewarding terrorism and would only intensify terrorism against Israel. Its unclear to me how Israel could even consider such a proposal.