A Confucian Solution
I am a Confucian, an American Confucian. To others, my solution might be naive and idealistic. But I believe this is the most simple and fundamental solution.
1. Turn hatred into love
The root of the conflicts between Israelis and Palestinians is obviously hatred. The conflicts will continue if the hatred remains. The most important thing then is to change the minds of the people, not only a few political leaders. Let love prevail. I do not think love was taught only by Confucius. It is the essence of all religions. I have a dream. One day, the attacks and the revenges come to an end and the Israelis and Palestinians treat each other as brothers and sisters. As a Confucian saint said, "Try to be harmonious with others, you are creating many friends; try to confront against others, you are creating many enemies." "All the peoples of the four oceans are brothers."
To our Confucians, killing is not human nature. You may believe your religion and your value is superior to theirs. In the eyes of an outsider, the differences between the two peoples are much smaller than those between Confucians and Buddhists. Since we can co-exist, your chance should be better.
2. Be United, Not Separated.
I do not think a Palestinian state is a good idea.
First, the negotiation is an impasse. Neither side will give up Jerusalem.
Second, it will be very painful for people to leave the homes they built.
Third, the two hostile states will continue to fight against each other.
We Confucians prefers union to separation. Separation leads to hatred and wars. In modern history, the worst example was the separation of Pakistan from India. In nature, it was an attempt to avoid the conflicts between Hindus and Muslims, the two largest religious group of one nation. The result has been disastrous. There have been several wars, let alone the current tension. The Israelis and Palestinians should be united and establish a union of Israel and Palestine. Different religious beliefs and ethnic groups should not be hinders for people to live together. The United States of American is a good example. Try to think, if the white, the black, and the native Americans were separated and set up their own nations, what would have been happened. From this aspect, the Jewish settlements in areas with greater Palestinian population will be a contribution to the union. In the union, the Israelis and the Palestinians should enjoy the same rights. People then will live in real peace, not the false peace protected (often unsuccessfully) by heavily armed peace keepers. And this union will set up a valuable example for the world.
By the way, the real solution to the Kashmir conflict is the reunion of India and Pakistan.