It's just as true that Jewish leaders in 1948 saw partition as a neccessary first step to a Jewish state in all of Palestine.
You have some quotes for that?
Oh yes.

Ben Gurion:
"after the formation of a large army in the wake of the establishment of the state, we shall abolish partition and expand to the whole of the Palestine"
(1937, quoted in The Birth of Israel: Myths and Realities by Simha Flapan)
From One Palestine, Complete: Jews and Arabs Under the British Mandate
by Tom Segev:
"Ben Gurion favoured partition. He did not accept all the details, but he saw the proposal as the first step in a plan to gradually lay claim to the entire country, on both sides of the Jordan river. "A partial Jewish state is not the end, but the begining," he explained to his son Amos, "a powerful impetus in our historic steps to redeem the land in it's entirety."
From Righteous Victims By Benny Morris:
"Weizmann and Ben-Gurion pressed for a solution based on partition. Said Weizmann: 'The Jews would be fools noi to accept it even if [the land they were allocated] were the size of a table cloth" Both saw partition as a stepping stone to further expansion and the eventual takeover of the whole of Palestine. "No Zionist can forgo the smallest ponion of the Land of Israel," Ben-Gurion was quoted as saying. He wrote to his son Amos: "[A] Jewish state in part [of Palestine] is not an end, but a beginning., .. Our possession is important not only for itself .. , through this we increase our power, and every increase in power facilitates getting hold of the country in its entirety. Establishing a [small] state .. . will serve as a very potent lever in our historical efforts to redeem the whole country.""
From The Iron Wall: Israel and the Arab World by Avi Shlaim, quoting Menachem Begin the day after the UN voted for partition:
"The partition of Palestine is illegal. It will never be recognized... Jerusalem was and for ever will be our capital. Eretz Israel will be restored to the people of Israel. All of it. And forever."
There're a lot more, if you look. Ben Gurion made simnilar statements a lot in the late 30s.
How much these statements represent Zionist leader's desires, and how much concrete plans, I don't know. I suspect it was more a desire to claim the whole of Palestine than a concrete plan, but clearly they had not resigned themselves to a state in part of Palestine.
Don't know about that. I see a lot of blue ribbons these days in Israel, not just orange.
But how much of that is down to facing reality? Isn't it true that most Israelis feel the West Bank rightfully belongs to them? I think the majority of the Israeli population is ready to give up territory for peace, but how many have accepted that a Palestinian state is
right, rather than just necessary for peace?
To quote Nadav Shragai again:
"Morally, historically and religiously, the right of the Jewish people to the Land of Israel, takes precedence over the right of other peoples here. The internal dispute within Israel is over what is possible within the framework of the security and international reality that the country faces."
I think you'll find a great many on the Palestinian side who are also ready to accept an Israeli state, for the same reasons, and equally I think most Palestinians believe Israel rightfully belongs to them.
In both cases people are ready to accept the existence of the other, but I don't think either side truly sees the fairness of the two state solution.
Might be wrong, but I believe the US's policy has been to say that settlements do not promote progress to peace. I don't recall the US ever saying all settlements Israel ever initiated were illegal.
From a State Department briefing for congress:
"Since the first Israeli settlements were created in the occupied territories following the June 1967 war, the United States has held that such settlements are illegal under international law"
From the Mitchell report 2001:
"The Interim Agreement provides that "the two parties view the West Bank and Gaza as a single territorial unit, the integrity and status of which will be preserved during the interim period." Coupled with this, the Interim Agreement's prohibition on taking steps which may prejudice permanent status negotiations denies Israel the right to continue its illegal expansionist settlement policy. In addition to the Interim Agreement, customary international law, including the Fourth Geneva Convention, prohibits Israel (as an occupying power) from establishing settlements in occupied territory pending an end to the conflict."
The US also voted in favour of Security Council resolution 465 (I think) which says:
"Determines that all measures taken by Israel to change the physical character, demographic composition, institutional structure or status of the Palestinian and other Arab territories occupied since 1967, including Jerusalem, or any part thereof, have no legal validity and that Israel's policy and practices of settling parts of its population and new immigrants in those territories constitute a flagrant violation of the Fourth Geneva Convention relative to the Protection of Civilian Persons in Time of War and also constitute a serious obstruction to achieving a comprehensive, just and lasting peace in the Middle East;"
The US has also abstained from several similar votes, rather than use it's veto.
The US might not announce it's opposition as strongly as most other countries, but it seems to be the settled view of the US government, at least until Bush's speech last year, that the settlements are illegal.