"Do not allow them to reside in your land"
In addition to the more general Torah commandment to take possession of the land of Israel, the Torah warns:
"Do not allow them to reside in your land" (Exodus 23:33). The Rambam (Hilkhot Avoda Zara 10:6) explains that when we have the power
it is forbidden to allow any non-Jew to reside in our land (with the exception of a "
Ger Toshav" - a resident alien who has accepted some of the laws of Judaism).
Torah authorities, though, are divided over the question: To whom does this prohibition apply? Some hold that only a non-Jew who, before a court, professes faith in the God of Israel and takes upon himself to observe the seven commandments of Noah’s descendants, is considered a
Ger Toshav who is permitted to live in Israel. Others are of the opinion that even if one does not accept these responsibilities before a court, so long as he does not worship idols and upholds the seven Noahide laws, he is not prohibited from living in Israel.
According to the latter opinion, good and amiable Muslims are permitted to live in Israel, because Islam does not embrace idolatry. Arabs, though, who are hostile towards us clearly do not upkeep the seven Noahide laws, for they fail to recognize the God of Israel Who has given us the land of Israel. In addition, such Arabs support terrorists, thereby violating the Noahide prohibition against murder, and they refrain from establishing courts of law which will try these terrorist, also one of the seven Noahide commandments.
While it is true that some early authorities are of the opinion that the biblical injunction, "Do not allow them to reside in your land" applies exclusively to the "seven nations" (Hittites, Girgashites, Amorites, Canaanites, Perizites, Hivites, and Yebusites), the majority take it to apply to any gentile who fails to uphold the seven laws of Noah’s descendants. This being the case, according to the two main opinions brought above it is forbidden for a ruling Jewish government to allow
Arabs who refuse to accept Jewish sovereignty to live in Israel, and it goes without saying that it is forbidden to present them with land where they will be able to increase the number of non-Jews who do not uphold the Noahide laws.
http://www.yeshiva.org.il/midrash/shiur.asp?id=2342