To be honest, there is only one solution to this. Segregate the Arabs and the Jews, and allot different countries for them. It has been proven beyond any doubt that the Arabs and the Jews can't live together. All the Jews (including the Settlers in West Bank and East Jerusalem) should be evacuated to Israel proper, and all the Arabs (including Israeli Arabs) should be evacuated to West Bank and Gaza. A 25 meter-high concrete wall should be constructed between the two countries.
Lolwat? This is what happend. They're already segregated though Israel keeps stealing more and more land and keeping the Palestinians in what is essentially an open air concentration camp. Both sides are as bad as each other though and they'll never let their hatred of each other pass so there'll never be peace there because they just can't live side by side