Because when Israel builds settlements it apparently creates an irreversible situation on the ground. The Palestinians - to say nothing of the broader Arab world - have absolutely no reason to believe that Israel would ever remove settlements in the context of a peace deal. No Israel Prime Minister has ever uprooted Jewish settlements before. Makes perfect sense:

U.S. Secretary of State Condoleezza Rice called on Israel on Tuesday not to undermine peace negotiations with the Palestinians after a Peace Now report found it had nearly doubled Jewish settlement construction in the last year... Rice said the Israeli construction has threatened to undermine the talks. "I think that it is no secret, and I've said it to my Israeli counterparts, that I don't think the settlement activity is helpful to the process," she said. "... anything that undermines confidence between the parties ought to be avoided."

You know what else undermines confidence? Palestinian terrorism. And you know what else also undermines confidence? When Palestinians fire Qassams, builds fortifications, raises an army, and smuggles in weapons. And yet, as Soccer Dad points out, the Secretary's musings in that direction seem a strangely truncated:

The approach to threats against Israel is one of those things that is taken casually. Here's Secretary Rice on the regular but (relatively) infrequent Qassams that still get fired into Israel despite the ceasefire with Hamas:
QUESTION: How does the ceasefire in Gaza help matters? Has it endured better than you imagined?
SECRETARY RICE: Well, it has its ups and downs, obviously. But look, I - we said early on that if there - that calm in Gaza would be a useful thing because it - the Egyptians, who - with whom we worked, have managed to keep what is a very fragile situation at least stable, and that's certainly a help to any process of trying to move forward on the peace process.
Ultimately, though, Gaza has to be resolved and it has to be resolved on the basis of the - Abu Mazen's program for it, which is that legitimate Palestinian Authority institutions have to be reinstated.

Even if she fessed up to the myriad ways that Hamas is provoking Isr - err, reducing confidence – she'd still be unblinkingly insisting that the solution is Fatah control over Gaza. Which is exactly what's going to happen - except instead of "Gaza" substitute "the West Bank" and instead of "Fatah" substitute "Hamas":

Well, many PA leaders agree. Firas Press is reporting that a large number of PA leaders are sending their kids to school - in Jordan. They anticipate that sometime during this school year there will be widespread fatal Hamas/Fatah violence of the type that shook Gaza last year and they want to keep their kids safe. Moreover, they are scrambling to get jobs for the PA diplomatic corps abroad so they don't get caught in the crossfire when Hamas starts hunting Fatah leaders in the West Bank. They are taking Hamas' recent threats to conquer the West Bank very seriously.

At least the US hasn't been mindlessly pouring direct aid and security assistance into the West Bank. Because when Hamas gets around to rolling it, that aid would - in retrospect - seem like kind of a mistake in judgment now wouldn't it?

References:
* Rice calls for end to West Bank settlement construction [Ha'aretz]
* Oh so casual [Soccer Dad]
* PA leaders think Hamas will take over the West Bank [Elder]
* Abbas: That Deal We Just Signed That Would Give Hamas Billions Of Dollars Of International Aid And US Security Assistance? Total Accident. [MR]

Previously:
* Rice Pressures Israel Because Palestinians Are Feeling "Pessimistic"
* Another State Dept Bait And Switch - Rice Says PA Should Control Gaza-Egypt Border (Plus: EU Maybe Kind Of Thinking About Fulfilling Rafah Agreement) [MR]
* Confirmed: Rice Went Out Of Her Way To Screw Israel On Lebanon II