Figure out a way to get the Palestinian extremists to stop killing the Palestinian moderates and then there might be someone on the Palestinian side to hold useful negotiations with.
A peaceful partition, which considered the desires of the Palestinian majority, might have done that. In the present, the only way to stop the Palestinian extremists is to convince the rest of Palestine that they are liars....which isn't going to happen as long as Israel has military control over the post 67 areas, because as long as that happens, the Militants will in fact be correct when they say that Israel is sending armies to conquer Arab land. There is no getting around that issue: as long as land is seen as unjustly occupied, its inhabitants will continue to become violent. Some only attack military outposts in the occupied zones, others take the even more grossly immoral and criminal terrorist route...but neither is going to go away without some step towards ending the occupation.
You seem to think that Israel is the bad guy in that situation. In my view, Israel has been most restrained in its dealing with the Palestinians. The Palestinians would be howling if I had been running the IDF.
What would you do differently?
Remember how the Russians reacted when one their embassy staffers was kidnapped in Beirut back in the eighties? The Islamic militias released him PDQ, didn't they? I'd be willing to negotiate in good faith at any time. If my opponent chose military action instead, my military aim would be to make them decide that military action had been a really, really, really stupid move.
In the first place, it was the Jewish immigrants who chose military action, and the Palestinians tried to make that rebellion a stupid move and failed. As a result, there were reprisals on both sides that have never ended. I think it's a bad policy because of this fact.
Second, the Russians are a great example....just look at how successful they've been in scaring people into submission. Afghanistan, Chechnya, and Georgia all came out willing to negotiate the Russian invasion of their lands with open arms because the Russians were really violent, and spared no scruples in attacking the insurgents and terrorists. Oh wait, I might be wrong on that....I'm pretty sure all three did nothing but fight every last Russian incursion to the death, and in Chechnya it's still happening. What have the Russians gotten themselves in return for occupying Kabul and levelling Grozny? Millions of people who hate Russia, terrorism, and rebellion. If the Russians, who are not exactly known for respecting the bounds of human decency in warfare, can't stop anti-Russian violence by military action alone, what makes you think the Israelis or the US are ever going to?
I want to make clear that I do agree that the Palestinian "leaders" like Hamas are criminal, and should be punished for all terrorist attacks they've committed. I just don't think they're ever going to go away until we let the rest of the Arab world know that we are willing to give them a better deal, and that they'll have our support and real consideration when they take the risks they'll need to in order to establish their own democracies and root out terrorism.
As long as the US and Israel deny that there's anything wrong with the occupation in the first place, what're the odds Arabs will believe us when we say we'll help them get rid of the terrorists and let them form their own governments?