No it is not in Israel's best interest to divide the land.  If the Arab/Palestinians living in Judea & Samaria are happy to become Israeli citizens and live peacefully under an Israeli government, then that is how it should be.  If they are not happy to do that, then they should go back to the Arab countries their forefathers originally came - mostly Jordan.  There were no Palestinians living in Israel in AD135 when the Romans expelled the Jews from the land, so who gave them the right to move in there in the intervening years until 1948 when the Jewish people came home again to their land?