Here is my suggestion for lasting peace in Israel and Palestine:

1. Israel should withdraw from Gaza Strip and West Bank
2. Gaza Strip should merge with Egypt. West Bank should become independent Palestine.
3. Population Exchange: All Israelis living in West Bank should move to Israel proper, and all Arabs (including Israeli citizens) living in Israel proper should move to West Bank.
4. Jerusalem should be split in to two, with Western part going to Israel and Eastern part to Palestine.
5. International peacekeepers (only from countries which are willing to recognize Israel) should be placed on the Israel-Palestine border.

Some of my suggestions (especially #3) might seem to be outrageous. But IMO, this is the only hope for lasting peace in the region.