The Palestinian issue is not going to be helped by recognizing the area as a state. Nor, to be honest, do I feel it deserves such recognition given the nature of its screwed up government and institutions, and its lack of historical precedent. It hasn't the industrial or resource base to sustain itself as a state, unaided. It doesn't have the water. It doesn't have the organizational structure. And the space involved is too damned small.
I understand the emotions involved. I've seen enough to know that if I was an Israeli I would _hate_ Palestinians, and Arabs in general. I would loath them. And if I was raised in the occupied territories I would _hate_ Israelis, and Jews in general.
My hate would not be unreasoning. There have been plenty of outrages between these two groups to justify them hating each other. Unfortunately, the hate causes the outrages and the outrages cause the hate, and it's a never ending cycle.
I do not see any logical way out of this even if Palestine became a state. It would be a sort of Arabic version of Bangladesh, but with the religious violence and organizational problems Pakistan is having, and there would probably be civil war between the Hamas and PLO people. It would be a local cats-paw for other nations, because of its lack of coherent government, and because of the desperate need for foreign and military aid.
The only sensible solution I see is for the existing territories to be split up between Jordan and Egypt.