Abir Dandis, the mother of the two girls who were murdered in the Negev town of Al-Fura’a last week, couldn't find a police officer to listen to her warnings, neither in Arad nor in Ma’ale Adumim. Both police stations operate in areas where Israel wants to gather the Bedouin into permanent communities, against their will, in order to clear more land for Jewish communities. The dismissive treatment Dandis received shows how the Bedouin are considered simply to be lawbreakers by their very nature. But as a resident of the West Bank asking for help for her daughters, whose father was Israeli, Dandis faced the legal-bureaucratic maze created by the Oslo Accords.

The Palestinian police is not allowed to arrest Israeli civilians. It must hand suspects over to the Israel Police. The Palestinian police complain that in cases of Israelis suspected of committing crimes against Palestinian residents, the Israel Police tend not to investigate or prosecute them.

In addition, the town of Al-Azaria, where Dandis lives, is in Area B, under Palestinian civilian authority and Israeli security authority. According to the testimony of Palestinian residents, neither the IDF nor the Israel Police has any interest in internal Palestinian crime even though they have both the authority and the obligation to act in Area B.

The Palestinian police are limited in what it can do in Area B. Bringing in reinforcements or carrying weapons in emergency situations requires coordination with, and obtaining permission from, the IDF. If Dandis fears that the man who murdered her daughters is going to attack her as well, she has plenty of reason to fear that she will not receive appropriate, immediate police protection from either the Israelis or the Palestinians.

Dandis told Jack Khoury of Haaretz that the Ma’ale Adumim police referred her to the Palestinian Civil Affairs Coordination and Liaison Committee. Theoretically, this committee (which is subordinate to the Civil Affairs Ministry) is the logical place to go for such matters. Its parallel agency in Israel is the Civilian Liaison Committee (which is part of the Coordination and Liaison Administration - a part of the Civil Administration under the Coordinator of Government Activities in the Territories).

In their meetings, they are supposed to discuss matters such as settlers’ complaints about the high volume of the loudspeakers at mosques or Palestinians’ complaints about attacks by settlers. But the Palestinians see the Liaison Committee as a place to submit requests for permission to travel to Israel, and get the impression that its clerks do not have much power when faced with their Israeli counterparts. In any case, the coordination process is cumbersome and long.

The Palestinian police has a family welfare unit, and activists in Palestinian women’s organizations say that in recent years, its performance has improved. But, as stated, it has no authority over Israeli civilians and residents. Several non-governmental women’s groups also operate in the West Bank and in East Jerusalem, and women in similar situations approach them for help. The manager of one such organization told Haaretz that Dandis also fell victim to this confusing duplication of procedures and laws. Had Dandis approached her, she said, she would have referred her to Adalah, the Legal Center for Arab Minority Rights in Israel, which has expertise in navigating Israel’s laws and authorities.

John Kerry revealed his long-awaited plan for peace in the Middle East on Sunday, hinging on a $4bn (£2.6bn) investment in the Palestinian private sector.

The US secretary of state, speaking at the World Economic Forum on the Jordanian shores of the Dead Sea, told an audience including Israeli president Shimon Peres and Palestinian leader Mahmoud Abbas that an independent Palestinian economy is essential to achieving a sustainable peace.

Speaking under the conference banner "Breaking the Impasse", Kerry announced a plan that he promised would be "bigger, bolder and more ambitious" than anything since the Oslo accords, more than 20 years ago.

Tony Blair is to lead a group of private sector leaders in devising a plan to release the Palestinian economy from its dependence on international donors. The initial findings of Blair's taskforce, Kerry boasted, were "stunning", predicting a 50% increase in Palestinian GDP over three years, a cut of two-thirds in unemployment rates and almost double the Palestinian median wage. Currently, 40% of the Palestinian economy is supplied by donor aid.

Kerry assured Abbas that the economic plan was not a substitute for a political solution, which remains the US's "top priority".

Peres, who had taken the stage just minutes before, also issued a personal plea to his Palestinian counterpart to return to the negotiations.

"Let me say to my dear friend President Abbas," Peres said, "Should we really dance around the table? Lets sit together. You'll be surprised how much can be achieved in open, direct and organised meetings."

Thick locks hug the front gates of shuttered shops, now covered in graffiti and dust from lack of use. Only a handful of customers pass along the dimly lit road, sometimes stopping to check the ripeness of fruits and vegetables, or ordering meat in near-empty butcher shops.

“All the shops are closed. I’m the only one open. This used to be the best place,” said 64-year-old Mustafa Sunocret, selling vegetables out of a small storefront in the marketplace near his family’s home in the Muslim quarter of Jerusalem’s Old City.

Amidst the brightly coloured scarves, clothes and carpets, ceramic pottery and religious souvenirs filling the shops of Jerusalem’s historic Old City, Palestinian merchants are struggling to keep their businesses alive.

Faced with worsening health problems, Sunocret told IPS that he cannot work outside of the Old City, even as the cost of maintaining his shop, with high electricity, water and municipal tax bills to pay, weighs on him.

“I only have this shop,” he said. “There is no other work. I’m tired.”

Abed Ajloni, the owner of an antiques shop in the Old City, owes the Jerusalem municipality 250,000 Israeli shekels (68,300 U.S. dollars) in taxes. He told IPS that almost every day, the city’s tax collectors come into the Old City, accompanied by Israeli police and soldiers, to pressure people there to pay.

“It feels like they’re coming again to occupy the city, with the soldiers and police,” Ajloni, who has owned the same shop for 35 years, told IPS. “But where can I go? What can I do? All my life I was in this place.”

He added, “Does Jerusalem belong to us, or to someone else? Who’s responsible for Jerusalem? Who?”

Illegal annexation

Israel occupied East Jerusalem, including the Old City, in 1967. In July 1980, it passed a law stating that “Jerusalem, complete and united, is the capital of Israel”. But Israel’s annexation of East Jerusalem and subsequent application of Israeli laws over the entire city remain unrecognised by the international community.

Under international law, East Jerusalem is considered occupied territory – along with the West Bank, Gaza Strip and Syrian Golan Heights – and Palestinian residents of the city are protected under the Fourth Geneva Convention.

Jerusalem has historically been the economic, political and cultural centre of life for the entire Palestinian population. But after decades languishing under destructive Israeli policies meant to isolate the city from the rest of the Occupied Territories and a lack of municipal services and investment, East Jerusalem has slipped into a state of poverty and neglect.

“After some 45 years of occupation, Arab Jerusalemites suffer from political and cultural schizophrenia, simultaneously connected with and isolated from their two hinterlands: Ramallah and the West Bank to their east, West Jerusalem and Israel to the west,” the International Crisis Group recently wrote.

Israeli restrictions on planning and building, home demolitions, lack of investment in education and jobs, construction of an eight-foot-high separation barrier between and around Palestinian neighbourhoods and the creation of a permit system to enter Jerusalem have all contributed to the city’s isolation.

Formal Palestinian political groups have also been banned from the city, and between 2001-2009, Israel closed an estimated 26 organisations, including the former Palestinian Liberation Organisation headquarters in Jerusalem, the Orient House and the Jerusalem Chamber of Commerce.

Extreme poverty

Israel’s policies have also led to higher prices for basic goods and services and forced many Palestinian business owners to close shop and move to Ramallah or other Palestinian neighbourhoods on the other side of the wall. Many Palestinian Jerusalemites also prefer to do their shopping in the West Bank, or in West Jerusalem, where prices are lower.

While Palestinians constitute 39 percent of the city’s population today, almost 80 percent of East Jerusalem residents, including 85 percent of children, live below the poverty line.

“How could you develop [an] economy if you don’t control your resources? How could you develop [an] economy if you don’t have any control of your borders?” said Zakaria Odeh, director of the Civic Coalition for Palestinian Rights in Jerusalem, of “this kind of fragmentation, checkpoints, closure”.

“Without freedom of movement of goods and human beings, how could you develop an economy?” he asked.

“You can’t talk about independent economy in Jerusalem or the West Bank or in all of Palestine without a political solution. We don’t have a Palestinian economy; we have economic activities. That’s all we have,” Odeh told IPS.

Israel’s separation barrier alone, according to a new report by the United Nations Conference on Trade and Development (UNCTD), has caused a direct loss of over one billion dollars to Palestinians in Jerusalem, and continues to incur 200 million dollars per year in lost opportunities.

Israel’s severing and control over the Jerusalem-Jericho road – the historical trade route that connected Jerusalem to the rest of the West Bank and Middle East – has also contributed to the city’s economic downturn.

Separation of Jerusalem from West Bank

Before the First Intifada (Arabic for “uprising”) began in the late 1980s, East Jerusalem contributed approximately 14 to 15 percent of the gross domestic product (GDP) in the Occupied Palestinian territories (OPT). By 2000, that number had dropped to less than eight percent; in 2010, the East Jerusalem economy, compared to the rest of the OPT, was estimated at only seven percent.

“Economic separation resulted in the contraction in the relative size of the East Jerusalem economy, its detachment from the remaining OPT and the gradual redirection of East Jerusalem employment towards the Israeli labour market,” the U.N. report found.

Decades ago, Israel adopted a policy to maintain a so-called “demographic balance” in Jerusalem and attempt to limit Palestinian residents of the city to 26.5 percent or less of the total population.

To maintain this composition, Israel built numerous Jewish-Israeli settlements inside and in a ring around Jerusalem and changed the municipal boundaries to encompass Jewish neighbourhoods while excluding Palestinian ones.

It is now estimated that 90,000 Palestinians holding Jerusalem residency rights live on the other side of the separation barrier and must cross through Israeli checkpoints in order to reach Jerusalem for school, medical treatment, work, and other services.

“Israel is using all kinds of tools to push the Palestinians to leave; sometimes they are visible, and sometimes invisible tools,” explained Ziad al-Hammouri, director of the Jerusalem Centre for Social and Economic Rights (JCSER).

Al-Hammouri told IPS that at least 25 percent of the 1,000 Palestinian shops in the Old City were closed in recent years as a result of high municipal taxes and a lack of customers. “Taxation is an invisible tool…as dangerous as revoking ID cards and demolishing houses,” he said. “Israel will use this as pressure and as a tool in the future to confiscate these shops and properties.”

She hasn't yet filled the post or filed a single line of copy, but the incoming New York Times correspondent for Jerusalem has already been judged. And it's damning. Apparently, soon-to-be bureau chief Jodi Rudoren has been sending bad tweets to the wrong people and that's enough to have Israel's rightwing defenders denounce the journalist, within hours, as biased and "anti-Zionist".

She should not be tweeting "cutesy missives" to Electronic Intifada co-founder Ali Abunimah. She shouldn't be approving a forthcoming book titled The Crisis of Zionism by American writer Peter Beinart. In fact, the most benign critics suggest, she should not be tweeting at all – which, we can guess, would not be the case had she decided to post about, say, the dry weather and deluge of hummus that await her in Jerusalem.

You could just dismiss such hasty and ill-founded pronouncements as idiotic. But the New York Times thinks it all significant enough actually to have responded to the complaints, assuring that the paper has "complete confidence in Jodi's fairness and integrity as a journalist" – adding, with an obviousness that must be spiked with sarcasm: "If we didn't, she wouldn't be taking on this assignment."

The incident is part of a broader rash of pouncing-upon from rightwing pro-Israelis that has sucked the oxygen out of any conversation about the country – especially in the US. Witness the recent storm over the phrase "Israel firsters": used to accuse people of putting policy on Israel above US interests, it sparked a row among liberal commentators on whether it carries connotations of dual loyalty that feed into antisemitic tropes. This was just another attempt to smear liberal American critics of Israel, and fed into the frustration over such blockading – best expressed in the title of one recent post: "Dear Israel lobby, we give up – please give us an acceptable way of insulting you."

Yet the real danger in all this is that the rush to throw charges of antisemitism at people who criticise Israel will desensitise vigilance over the real thing. Such tactics are meant to intimidate and paralyse, choke and divert the discussion over Israel's occupation and policies in the Middle East. But for every person silenced, there are growing numbers who, surveying the quality of the argument, will dismiss the pro-right Israel lobby solely on the basis of the bullying. It isn't just the nature of the bashing, but its compulsive frequency, especially when set against the paucity of actual arguments presented.

As more commentators are now saying: the trouble with this rightist campaign over Israel is in the content, which always trumps the delivery system. Incidentally, this is the theme of one of the articles that Rudoren was lambasted for tweeting, which quotes Beinart, from the book she wasn't supposed to like: "Israel does not have a public relations problem; it has a policy problem."

The Palestinian-Israeli actor Juliano Mer-Khamis, who has been shot dead at the age of 52, was a successful stage and screen performer, film-maker and activist, widely known for his work as the artistic director of the Freedom theatre in the refugee camp in the West Bank town of Jenin. Dedicated to equipping young Palestinians with the potent powers of art and self-expression, Juliano carved out a stage on which children could find their feet – and voice. The theatre's achievements have resonated around the world as a focal point of creativity against the odds.

In Israel, Juliano was a stage and television star. He was known abroad as a film actor, making his debut in the 1984 adaptation of John le Carré's The Little Drummer Girl, starring Diane Keaton, and his last role was in Julian Schnabel's Miral (2010), based on Rula Jebreal's autobiographical account of growing up as an orphaned Palestinian girl.

I first met Juliano – "Jule" – at the opening of the Freedom theatre in 2006. Then and many times subsequently, he spoke of building an autonomous space – both emotional and physical – for the children of the Jenin camp, traumatised by Israeli attacks and the occupation. Jenin was known as Israel's "terror capital" during the second intifada, or uprising, starting in 2000, because of the number of suicide bombers that came from the camp, and in April 2002 it was the site of fierce sustained conflict. Juliano said that the third Palestinian intifada should be cultural, with "poetry, music, theatre, cameras and magazines".

The Freedom theatre was a community project that evolved to include art exhibitions, drama therapy, film-making courses and a computer room. Currently in the middle of an expansion plan, the theatre has staged provocative plays, using drama to challenge power, corruption, conservatism and traditionalism.

A recent daring adaptation of Lewis Carroll's Alice in Wonderland brought criticism from sectors of Palestinian society. There were arson attempts on the theatre in 2009, over a production of Animal Farm that took George Orwell's satire of the corruption of socialist ideas and spun it into a critique of Palestinian politics. At the time, Juliano spoke of receiving death threats.

He was not a readily acceptable character in mainstream Israeli society – as an advocate of a bi-national state, he did not sugar-coat his views on the politics of the conflict.

The Freedom theatre continues the work of his mother, Arna Mer, who founded a children's drama therapy and education project at the camp during the 1980s. Juliano, by then an established actor, often helped his mother. As chronicled in the documentary Arna's Children (2004), which he directed, he returned to the camp in 2002, seven years after her death. The recent battles between the Israeli army and Palestinian fighters had reduced the Jenin camp to rubble – and razed Arna's theatre to the ground.

The actor sought out the children taught by his mother, and found that several had become militants and had been killed. Another, Zakaria Zubeida, was the military leader of the al-Aqsa Martyrs Brigade, but later put violence aside and joined the Freedom theatre.

Juliano was born in Nazareth: Arna was Jewish, and his father, Saliba Khamis, was a Christian Palestinian. Arna was in the Palmach, the armed wing of the Haganah, the Zionist resistance movement that operated in British mandate Palestine before Israel's creation in 1948. During the 1950s she became a committed member of the Israeli Communist party, which advocated bi-national democracy, and there she met Saliba, one of its leaders. Juliano spoke of the "racial lunacy" into which he was born – he said that his mother nearly bled to death when she gave birth to him in an Israeli hospital, because doctors knew of her Palestinian husband and refused to treat her.

When Juliano served in the Israeli army as a paratrooper, Saliba refused to speak to him for a year. Later, Juliano refused an order, went to prison and was dismissed. He came to describe himself as "100% Palestinian and 100% Jewish".

Juliano was killed by a masked gunman outside the Freedom theatre – an end he had predicted three years ago on Israeli television. He is survived by his wife, Jenny, who is expecting twins; by their son, Jay; and by his daughter Milay and stepdaughter Keshet, both from an earlier relationship.

• Juliano Mer-Khamis, actor, film-maker, theatre director and activist, born 29 May 1958; died 4 April 2011

Like other Arab citizens of Israel, Leyla Ahmoud is anxious about her future. A young mother of two girls with another on the way, Ahmoud says recent moves by the Israeli government are making it increasingly obvious that the Arabs are not welcome in their own country.

"I feel like my life is not in my hands," said 24-year-old Ahmoud, who lives in Umm al-Fahm, a mountain-ridge town of some 43,000 inhabitants in northern Israel. "The government decides how I live and where I live. We exist in fear, from one day to the next."

Israel's prime minister, Binyamin Netanyahu, famously referred to Arab citizens of Israel, who make up a fifth of the population, as a "demographic bomb" in 2003. His cabinet recently passed a new citizens bill that, if approved, will require all non-Jewish migrants to pledge loyalty to Israel as a "Jewish and democratic state" – although, apparently in response to international pressure, the law may now be amended to apply to all new migrants, including Jews.

The Association for Civil Rights in Israel (ACRI) points to a string of other laws in the pipeline that would require individuals from parliamentarians to film crews to swear their allegiance. During the latest round of peace talks, Netanyahu reiterated that the Palestinian Authority should recognise Israel as a Jewish state – again signalling the preference for an ethno-religious Israel rather than a state for all its citizens.

Just weeks ago, Israeli forces staged a training exercise to test the state's response to a potential revolt among its Arab citizens if a peace agreement involved their forced transfer to a new Palestinian state. In a comprehensive security drill, forces practised anti-riot tactics and established two detention centres to accommodate prisoners.

Israel's extreme-right foreign minister, Avigdor Lieberman, has ratcheted up talk of a population exchange with the Palestinian Authority, whereby illegal settlements in the occupied West Bank would become part of Israel while Arab towns such as Umm al-Fahm, in the northern area bordering the West Bank, would be turned over to a new Palestinian state.

Today in Umm al-Fahm, where the loyalty oath is referred to as "Lieberman's law", there is a sense of living inside a paradox. "On the one hand, the state is saying to us that, as Arabs, we are a danger and not welcome here," said Said Abu Shakra, the director of Umm al-Fahm's art gallery. "But on the other hand, we are constantly asked to prove our loyalty to the state."

While supportive of the Palestinian struggle for statehood, this population - which identifies itself as Palestinian-Arab or Palestinian-Israeli - has repeatedly indicated its wish to retain Israeli citizenship. Its struggle is for equality.

"Where else would I go? My life, my children, my future is here," said one 28-year-old mother of two, who did not wish to be named. "I don't have another place, but what can we do to stop it if they [Jewish Israelis] are the strong ones?" Residents of Umm al-Fahm, which is thought to date back to 1265, talk of family roots in the area stretching back hundreds of years.

"We find ourselves thinking about these things now," 50-year-old lawyer Adnan Asad said of a possible population exchange. "I think, if you do transfer us, just do it when the kids are still young so that they might have a change to adapt. We're making jokes about what we'll sell when we become the street traders from the Palestinian state that stand at Israeli junctions."

Recent developments have drawn protest from some Israelis who say they are alarmed by their government's "anti-democratic" and "fascist" legislation. ACRI has asked the prime minister to make clear that there are no transfer plans on the negotiating table, and l ast weekend, thousands demonstrated agaisnt the policies in Tel Aviv. Speaking at the protest, Knesset member Dov Khenin, of the leftwing Arab-Jewish party Hadash, warned: "The population transfer has turned from a nightmare into an operational plan."

In Umm al-Fahm, Israel's second largest Arab town, residents believe the policies aren't just bad for the Arab minority but for the entire Israeli population.

Abu Shakra said he had worked to further dialogue between Jews and Arabs in Israel in Israel for 15 years – but that the government now seemed intent on making this untenable. "They are looking for ways to provoke conflict, not to create dialogue or equality," he said. "After 60 years, it is time they embraced the Arab population and understood that if things are not good for Arabs in Israel, they won't be good for anyone."

The housing project currently under construction in Almon offers enticingly priced, spacious family homes with a garden and a view. The surrounding neighbourhood, also known as Anatot, sits on a ridge overlooking the Judean hills, near Jerusalem, a blaze of cultivated greenery in the parched landscape. Residents have a relaxed air, and newcomers who have recently relocated from Jerusalem wish they'd made the move years ago. If I were a prospective house-buyer, I'd be charmed. But I would not be looking here – because Almon is in the occupied West Bank.

It is a Jewish settlement with a population of around 1,000, established in the early 80s. Like all Jewish settlements in the Palestinian West Bank, Almon is illegal according to international law. But its residents do not fit the headline-grabbing stereotypes of fanatical settlers, motivated by a national-religious drive to claim land. There is a marked paucity of Israeli flags and no settler-slogan banners bedeck the streets. If the West Bank became part of an autonomous Palestinian state, residents of Almon would be unlikely to put up a fight, as the ideological settler movement has sworn to do. Instead, they would pack up and move back to Israel.

The settlement movement began almost immediately after Israel occupied the West Bank and Gaza, seized as the spoils of the 1967 Arab-Israeli war. Settlers were initially ideological but, by the 80s, the rightwing government that came to power realised that greater numbers of, perhaps less politically-motivated, Israelis would have to be enticed on to Palestinian land. Israel has always argued that settlements are a strategic and military asset. Former prime minister Ariel Sharon – one of the settler movement's biggest supporters – summed up Israel's approach in 1998 when he said of the occupied territories: "Everyone there should move, should run, should grab more hills, expand more territory. Everything that's grabbed will be in our hands. Everything we don't grab will be in their hands."

Yet in 2007, when the Israeli organisation Peace Now polled settlers about their motivations for living where they do, 77% cited "quality of life", suggesting that economic factors and proximity to Israeli cities were primary considerations. That percentage can be split into two camps: there is the rapidly expanding, low-income, ultra-Orthodox community, which, priced out of Jerusalem, has migrated to nearby settlements such as Modin Illit and Beitar Illit; then there are secular or mixed community settlements, such as Almon. These are often located close to the Green Line, the internationally recognised border between Israel and the Palestinian West Bank. And they exist primarily because the state wants them to.

In Jerusalem – just as in the rest of Israel – decades of state planning has priced people out of the city and into settlements in Palestinian East Jerusalem and the West Bank. Meanwhile, ideologically-motivated budgeting has resulted in enticements and benefits for Israelis who live on occupied Palestinian land.

Settlements, and the resources, infrastructure and military might required to keep them going, are a major impediment to negotiations to end the Israeli-Palestinian conflict. Under international pressure, for the past 10 months, Israel has operated a partial freeze on settlement construction. However, the incentives still offered to Israelis to live on Palestinian land are so considerable that, leaving politics aside, it would be silly not to take advantage of them.

To find out how easy it would be to buy a settlement home on Palestinian land in the midst of this supposed freeze, I pose as an Israeli buyer, looking for a reasonably priced property for myself, my fictitious husband and the family we're planning. Walking into a Jerusalem estate agency with an imaginary spend of £200,000, a realistic sum for an average Jerusalem couple, it comes as no surprise when the agent says, "With that sort of budget, you need to get beyond the city."

I've already checked the housing market online and seen that the price for a home in West Jerusalem – four bedrooms across around 100 square metres – can start at around £400,000. Jerusalem's housing problem is blamed variously on its lack of high-rise housing (in part because many observant Jews do not use lifts on Saturdays); on environmentalists, who have prevented the city's expansion to the west (the only direction within Israel's borders); and on the "ghost town" effect in well-heeled parts of the city, where foreign Jewish buyers have snapped up second homes, pushing up the prices. The housing market is under such stress that, last year, Jerusalem's mayor wrote to absentee home-owners, asking them to rent out or sell up.

The agent suggests Pisgat Ze'ev or Neve Yaakov, both in East Jerusalem. Though these areas are defined as settlements by the international community, Israel views them as neighbourhoods of Jerusalem and has prioritised rapid Jewish development here, at the expense of affordable housing in West Jerusalem. However, at £250,000 for around 120 square metres, these houses might still be too pricey.

I certainly can't afford a decent-sized property in the plusher Ramot or Gilo – also settlements, or "neighbourhoods", within Jerusalem's municipal boundaries. So the estate agent suggests Givat Ze'ev, a secular settlement a 10-minute drive north-east of Jerusalem. The agent doesn't currently have homes to view there, but properties in this settlement – and many others – are advertised online under the category "Jerusalem and surrounding area". A quick call to each settlement's secretariat would provide me with agents' phone numbers, and sometimes the numbers of private sellers, too.

Givat Ze'ev is a pretty settlement of 10,000 residents living in semi-detached homes on leafy, winding streets. It is spacious and organised, with shops, schools and health services. Everything about its planning is designed to make you feel as though you're in a satellite of Jerusalem – there are no demarcation lines, no checkpoints back into the city, and the Palestinian villages, if visible, are behind a wall. Like so many settlements that hug the Green Line, Givat Ze'ev is on the Israeli side of the separation barrier that cuts into the West Bank for around 80% of its path. The barrier route runs, in some places, up to 12 miles deep into the West Bank, but settlements on the Israeli side of it are, broadly speaking, "consensus settlements" – ones that Israelis assume will be conceded to the Jewish state in peace negotiations with the Palestinians.

At Givat Ze'ev there are plenty of large, affordable houses for sale, but the only new properties are on a recently-finished ultra-Orthodox project. I ask residents about new secular housing, but their response is, "Don't you read the news?" They're referring to the current 10-month freeze, but in August, Peace Now found that building on at least 600 settlement housing units had begun during that period, in more than 60 different settlements. Of those, it says, at least 492 were in direct violation of the freeze.

My search for affordable, secular housing leads me, eventually, to Almon. It's a short drive east of Jerusalem, and I've had to cross an Israeli checkpoint, but it's specifically for settler use – a nod, the "right" appearance and Israeli number plates get me waved through. Outside, a billboard advertises the number of the contractor, who confirms that 70 units are under construction at the site. The four-bedroom houses vary in size from 130 to 140 square metres, with gardens of up to 70 square metres, and they are shifting fast. The settlement is not officially exempt from the construction freeze, but Palestinian constructors are currently working on the site and homes could be ready within a year. The starting price is £175,150.

It is staggeringly cheaper than an equivalent property on the Israeli side of the Green Line, because it is on Palestinian land, confiscated by Israel. There are no market forces to dictate land value here, as there would be in Tel Aviv or West Jerusalem. Instead, the Israeli housing ministry regulates prices, keeping them low to attract settlement. Campaigners say the contractor will also have received considerable state subsidies for connecting new settlement buildings to water and electricity mains – another saving that's passed on to me, the buyer.

Calculating my hypothetical mortgage allowance gives me yet more incentive to live across the Green Line. All Israelis qualify for a state allowance, an add-on to the mortgage lent by the bank, but with more favourable repayment terms. Points are added to your basic state allowance if you have children, have served in the army, or if you are a new Jewish migrant. Then there is a top-up if you live in areas defined as "national priority zones", which include some under-populated parts of Israel and all settlements.

For a new property in Almon, I'd get almost £11,600 as a special allowance. But the allowances rise sharply for Israeli couples who pick homes in the ultra-Orthodox settlement of Betar Illit, near Jerusalem, or in Ariel, around 25km east of the Green Line, or in Kiryat Arba, a hardline settlement near Hebron. For each of those, I'd get a total allowance of around £40,200. When I ask, the housing ministry says that state subsidies vary according to the "security threat assessments" pertinent to each area, adding that properties on the Israeli border with Lebanon qualify for similar amounts.

Israeli settlements expert Dror Etkes describes how, at times, mortgages given in the West Bank have "included loans which, after a period of time, turned into grants". The Israeli human rights group B'Tselem reports that, between 1997 and 2002, the state put 419m shekels (around £72m) into state-subsidised "association mortgages" for 1,800 apartments, most of them in the West Bank. The state comptroller, investigating these payments, found they were not included in the housing ministry's budget. Responding to queries over this funding, the ministry said it was not intended for "the entire public" and that announcing it would have caused "unnecessary confusion".

The veteran Israeli journalist and author Danny Rubinstein remembers a time in the late 80s when contractors offered free cars to those who bought settlement homes. Meir Margalit, a Jerusalem council member for the leftwing Meretz party, claims that at around the same time, Israelis invested in settlement property, left uninhabited, in the knowledge that at some point the state would offer compensation to evacuate it. He says the practice was "an open secret among settlers".

Today, on top of my mortgage incentive, I'd get free nursery care for my children from the age of three, instead of five, as I would in Israel. Settlement schools are better funded, health services are allocated more state funds. I'd no longer get a 7% discount on income tax – that incentive was scrapped in 2003; I'd pay lower local taxes, but my local council would be twice as flush as those inside Israel, because of a central government funding bias. In 2006, the Adva Centre, an Israeli policy analysis organisation, found settlers pay 60% of the national average in local tax.

There are currently more than 200 settlements, including West Bank outposts and neighbourhoods in annexed East Jerusalem, and half a million Israelis live on the Palestinian side of the Green Line. B'Tselem says it is impossible to calculate the total state spend in settlement benefits, because "government ministries obscure documentation of the moneys in their budgets that are directed to the settlements". But Peace Now estimates that settlements cost Israel $556m (around £355m) a year – and it is clear that this cost is keenly felt by those living within Israel, since the state seems to prioritise settlements at their expense.

Responding to international pressure, in 2008 the Israeli government debated a plan to offer settlers cash to leave the West Bank, a move designed to target economic settlers rather than ideological ones. The proposal – backed by then prime minister Ehud Olmert – couldn't get through government. Yet there are currently thought to be lists of settlers who have expressed interest in leaving the West Bank, if compensated.

For as long as Israel has occupied Palestinian lands, there has been a dominant force within government that has kept the settlements project going. Driven by a mix of national-religious conviction, expansionist politics and military tactics, the settlements project has wholly controlled state agenda. B'Tselem describes the project as one of Israel's main national enterprises. State efforts to pull Israelis over the Green Line have been so forceful that, as Rubinstein puts it, "You could say it was a bribe on a national scale."

Israel has always played up the pain of dismantling the settlements. Yet as Israeli journalist Akiva Eldar writes in Lords Of The Land: The War For Israel's Settlements In The Occupied Territories, the "elixir of life" for these settlements is their infrastructure: the electricity, water pipes and military forces that guard them. Remove these, "and this project collapses like a house of cards". Today, Eldar describes Israel's purported inability to do so as "a myth perpetrated by the government to make us believe that it is impossible".

How hard would it really be to divert funds from the occupied West Bank back into Israel, thus encouraging settlers to move back – especially from somewhere like Almon, where residents have already said they will relocate if political realities dictate that they should?

One man who has lived there for 20 years says of the settlement, "It is not fanatic in a religious sense and not fanatic politically, either." Other residents agree. "We came here because we were looking for a nice, peaceful place near Jerusalem," says one woman, who still votes for the Israeli Labour party. "We didn't want to annoy anyone, and we are not ideological… The settler movement does not represent us."

The problem, as Rubinstein points out, is that what starts off as economics can eventually become ideological. "When you move [to the settlements]," he says, "you can't say, 'Well, I went there because I'm greedy.' You change your political opinion."