Using data from a large national representative survey of Palestinian high school students in Israel, this study examines the effect of the local labour market and the internal ethnic/religious segregation between Muslims, Christians and Druze, on students' occupational expectations. The data, which were collected in spring 1997, consisted of two types, these being data regarding students, and data regarding schools. The findings show that despite the disadvantages of the Palestinian minority as a whole within Israeli society, students tend to develop high occupational expectations. While the general level of their expectations can be explained by their educational and residential segregation from the Jewish majority, the multi-level analyses suggests that the internal segregation facilitates differential access to socio-economic resources, which generate different levels of occupational expectations between students from various ethnic/religious groups. More specifically, the findings demonstrate that the social and economic differences between Muslims, Christians and Druze are playing a central role in determining students' expectations, acting as a mechanism to preserve social inequality. The gender dimension of the occupational expectations and the influence of die segregation between Palestinian and Jewish students, are also discussed.