Is the disappropriation of a territory and its populace legal by
international standards? Specifically, I am asking in regards to the
Arab villages on the Israeli side of the international border. Would
it be diplomatically feasible for Israel to "turn over" Wadi Ara, Umm
el-Fahm, and similar districts to the Palestinians while voiding the
population's Israeli citizenship? Would the Palestinian Authority need
to consent to such an act?
I am asking because this can perhaps be done in conjunction with a
further disengagement in the West Bank whereby there would later be
two states: one with a stable Jewish majority and one Arab.

There is no such thing as 'International Law'
- although people keep trying to convince us that there is
- the same thing goes for 'Human Rights'

Technically the West Bank was conquered from Jordan in 1967
- Jordan shows little interest in getting it back

Realistically, Arabs in Israel would probably not relish becoming part
of a failed state

You have hit on the crux of the problam, demographics.
In my view Arabs in the until recently 'occupied territories' were
foolish not to politely request Israeli citizenship.

While there is no such thing as 'International Law' (note: there are
conventions) there is such a thing as International Pressure.

If the Arabs started proudly displaying blue flags with a green centre
inside the Star of David (even Christian ones), there would be
considerable international pressure on Israel to regularize
citizenship.

Personally I reckon that it in Israel's interest to be extremely
generous to its non-Jewish citizens. Their affluence will influence
their cousins.
They have to keep quiet at present, but that is understandable.

The short answer is that Israel can do as it pleases, it may get
castigated in the international press, but they are pretty biased and
'selective' anyway.

Digressing, I reckon that injecting a little humour into the situation
would help - while it is annoying having a bunch of unemployed
layabouts firing inept rockets at you, retalliating with itching
powder or lurid paint has a considerably lower risk of killing
photogenic infants than using lethal material.

You are asking several different things.

First of all, I believe you have the concepts of property and
sovereignty mixed up. A country does not own a territory, it exercises
sovereignty over it. So turning over a territory to another country is
not "disappropriating" its populace. If you own a house in country A,
and the area where your house is is turned over to country B, you'll
still own your house, not country B. However, you will own it under
the laws of country B, and pay property taxes to country B, since
country B now has sovereignty over it.

Now, whether Israel can turn over territory to the Palestinian Authority.

Legally: of course it can. States (although the PA isn't technically a
state, it *is* a person of international public law and therefore can
be considered as such within the scope of this question) have been
trading territories since the dawn of time. This is what treaties were
invented for. Since altering your territory is such an important
thing, the constitutions of most democratic countries place some
restrictions of internal law on them, such as passage of an act by the
legislature, or a referendum in the area in question, but otherwise a
treaty would definitely suffice. Even though I can't think of a single
occurence of a country unilaterally *offering* bits and pieces of its
land to a neighbouring country, I would have to think the PA would
have to -- by definition -- agree to such a treaty.

As far as the citizenship of the people on the said territory, the
treaty would have to settle that question. When Germany invaded France
in 1871 and took its Alsace-Moselle region, the first Treaty of
Versailles offered inhabitants the choice to keep their French
citizenship and move to France, or become German citizens. When France
regained that region in 1918, the second Treaty of Versailles allowed
no such choice, since France viewed that territory as occupied, and
thus presumed all its inhabitants as French.

Diplomatically, that is an entirely different question. Since the UN
is a vehemently anti-Israeli body, which has condemned alleged Israeli
abuses at every turn but terrorist attacks only once, and under stern
US pressure, it would certainly applaud at it giving up all the
territory it wants. However, it would gain very little from it.

Israel has spent a considerable amount of resources strengthening its
borders, notably with the (in)famous wall, which has lowered the
number of terrorist attacks dramatically. Prime minister Olmert was
elected on a platform of giving Israel permanent borders, so it is
hard to believe he would be inclined to give up pieces of land here
and there just for fun.

Since you are asking this with a view to the creation of two stable
and neighboring Israeli and Palestinian states, I would dare say that
the best bet to achieve that would be first to secure and stabilize a
meaningful *border* between the two territories. This is also why
Ariel Sharon built the wall, and the events in the region seem to
corroborate this view, since Israel controlling its border is a
necessary prerequisite for Palestine getting closer to statehood, not
abandoning territory simply because ethnic Arabs happen to live there.