The Jerusalem Post reports that both Saeb Erkat and Mahmoud Abbas have rejected an Israeli proposal which would have extended the settlement freeze in exchange for Palestinian recognition of Israel as the Jewish national home. Erkat called the proposal "racist" and an "Israeli game", while Abbas' spokesperson was slightly more measured, saying that "The topic of the Jewishness of the state is not connected at all to the issue [of the building freeze]."
My main concern is that talks continue, so I'm consequently unhappy at Palestinian rejection here. Obviously, the question of recognition is highly symbolic -- but it is only symbolic, and it hardly strikes me as an unfair trade for tangible concessions (which are also, to be sure, highly symbolic in addition to their concrete weight). On the other hand, I doubt that the ultimate resolution of the conflict is going to hinge on the precise words Palestinians use to characterize the Israeli state.
In an ideal world, we would say Israel should simply freeze settlement development because it is the right and intelligent thing to do. In an ideal world, the two states for two peoples formulation would not be controversial. Alas, it's not the ideal world. The one thing I can say is that Israel appears willing to talk without any preconditions -- it merely is saying that, if we are going to play the precondition "game", the path has to go both ways.