The situation in Palestine/Israel looks as bleak as ever; the Palestianians politically divided into to semi-autonomous mini-states, with the Israeli government ruling over each of them with impunity.
For the purposes of Israeli "security", the Palestinians in the West Bank live in an area surrounded by a wall: a wall which conveniently slices of chunks of supposedly "Palestinian" land for Israel proper; and behind the wall, Israeli "settlers" live in towns and villages, guarded by Israeli soldiers at dozens of checkpoints throughout the territory.
The Palestinians in Gaza, due to the territory being ruled by the more actively-proactive regime of Hamas, rather than the more passive regime of Fatah in the West Bank, are collectively punished by the Israeli administration: borders allow only a trickle of aid through to Gaza, and the sea is blockaded. Any attempts at breaking the blockade are either turned away, or, as was recently shown, violently dealt with.
Before the founding of Israel, the Jews had no homeland to call their own. Since the founding of Israel, the Palestinians have had no homeland to call their own.
The current situation is unsustainable. Niether the Israelis or Palestinians would accept rule by the other. The wounds of the past decades are too deep; both sides hold too much hate of the other to contemplate further humiliation.
Very well, then. If neither side can tolerate the other, here's the alternative. Clues to a possible solution lie in comparisons to other situations elsewhere; such as in Northern Ireland, Bosnia, Lebanon, Kosovo and South Africa. Strands from how each of these situations were solved seems the be the only way I can think of to make some kind of fair peace exist in the Middle East.
Step 1:
If Israel wants to treat the Palestinians as second class citizens, then the world community should deal with it in the same way as the aparthied regime of South Africa. It cannot claim to be a "Western" country whilst holding such contempt for so many of its own citizens. Sanctions, international isolation, and so on, are the way to bring sense to the Israeli government and to the negotiating table with the UN. In the USA, this involves removing the legitimacy of the Israel lobby by a widespread campaign educating Jews that the government of Israel is doing the worst possible job for promoting the cause of the Jewish people.
Step 2:
The territory of Israel/Palestine becomes part of a UN trustee-ship. The "government" of the territory passes to the UN secretary-general (or an internationally-trusted understudy); ministers to the government comprise (as in Lebanon, another multi-faith democracy) a balance of the different faiths represented in the territory at the 1947 levels (i.e. wiping the slate clean and putting the clock back to last time the UN last considered the Palestinian Question, as since 1947 Jews have moved to the territory with the express purpose of boosting their cause for seperate statehood).
Step 3:
The policing and defense of the territory (as now in Northern Ireland) is also comprised of a balance of the different faiths in the territory. The police force is overseen by an impartial foreign high representative (as in Bosnia), and at street-level, foriegn peacekeepers are mingled in with the native police force (as below).
At a defence level, the territory has a multi-faith multinational peacekeeping force (e.g. including the UK, France, Russia, Turkey, Indonesia, Pakistan and China), each of the half-dozen or so countries involved with a force of around 5-10,000 troops.
This provides no guarantees, of course, but it at least takes the responsibility of statehood out of the hands of the Israelis and Palestinians till a time in the future (ten years? more?), when they can actually start to think of each other as real human beings, and then consider living together without UN paternalism. But, if they're going to act like a bunch of schoolchildren, what else can you do?
