This article sets out to show the widening gulf that has emerged between the international community's professed diplomatic endgame to resolve the Israeli-Palestinian conflict following a two-state paradigm, the aid strategy it has put forward since 1993 in support of this political goal, and the developments on the ground in East Jerusalem, the West Bank and the Gaza Strip. Within the context of a volatile Oslo peace process and the intifada, aid to the Palestinians has mainly been used as a substitute for international political will and to compensate for the lack of genuine bilateral negotiations between the parties. Aid, however, cannot buy peace. Not only has the international community's ‘aid for peace’ strategy failed to attain its stated political and socio-economic objectives, but it is also the central contention of this article that such international intervention has actually been harmful. Donors have ended up financing Israel's continued occupation of the Palestinian territories and its expansionist agenda at the expense of international law, the well-being of the Palestinian population, their right to self-determination, and the international community's own developmental and political goals. Looking ahead, despite the widespread current optimism generated by Gaza disengagement, this does not bode well for the emergence of a viable Palestinian state or the individual and collective security of the Israeli and Palestinian people.