My opinion:

Assuming gaza as an indep. Palestinian state:

Israel has no interests in a strong palestinian state on its border, and will work in small but effective ways to keep the state from flourishing- such as controlling access by coast and by land, making a free economy difficult. By 'casting off' a large number of non-jewish people, they help maintain the demographics of a putatively 'Jewish state', and also the Israeli power structure plays to its 'other' power base- the west, who, in large part keep Israel afloat. But they don't want or need a successful palestinian state. If anything, a failed state is someone elses mess, and pudding proof of 'what they have been saying all along'. A good political tool.

The Palestinian political power structure defines itself via Israeli oppression, and its power base is entirely composed of the palestinian oppressed whipped up into a hateful fanatical zeal, and the sympathetic (or anti-semetic, in many cases) muslim world. Take away Israeli oppression, and they have nothing. Do you think Iranian mullahs and Saudi princes will dish out money for power grids, sewage treatment plants and fertilizer factories? No, they want to put their money behind whatever kills the most Jews in the most horrific fashion possible. Sick, sad, sorry- but true. If they support the state, it will only be because they see it as a stepping stone to the death of Israel.

Frankly, in my view, the two sides are both hideous.

Power in that area is deeply entangled with the status-quo, with hatred and with oppression. It is the very essence of an intractable political problem, and the one realistic opportnity for change died in the late 90's, a victim of Arafat. I don't think we'll ever see a true solution in our lifetime. Sadly, I think containment and isolation may be the only way. Cut off all aid to palestinians AND Israel, and they might have to deal with eachother... or it might just give them the excuse to go that last mile and bathe the streets in the blood that a significant political fraction of both sides so desperately want.

Even if you moved everyone to different parts of the world, razed every building down to dust and sterilized it all with nukes, they would find a way back to kill eachother over the ashes.

D