Israel needs to face up and deal with that fact it can't push everyone around, and do what it wants all the time. Go against the UN, and try to hold land it took in violation of the UN...and expect Security any time soon.
This is the actual history of how it happened.
The U.N. voted on the creation of two States: one for the Jewish inhabitants of the Palestine Mandate, and a second one for the Arab inhabitants. The Jewish residents accept, but the Arabs and Palestinians refuse the two State solution and the 1948 war is under way.
Israel wins the war, and wins a series of wars after that.
It is ironic to note that Palestinians that stayed in Israel have rights: they received full Israeli citizenship. As of 2/2002 there were 980,000 Arab Israeli Citizens (mostly Muslim, some are Christian) who have the right to vote and have parties of their own represented in the Knesset, Israel's parliament. It is also ironic to note that neither Jordan nor Egypt gave the Palestinians the option of an independant state, but Israel did in October 2000.
Note that from 1948 to 1967 both the West Bank and Gaza were not under Israeli administration. The West Bank was administered by Jordan, yet no Palestinian State was created. Similarly, the Gaza strip was under Egyptian control, yet no Palestinian State came into being.
In the 1978 Peace deal with Egypt, Israel tried to return the Gaza Strip to them as well, Egypt refused.
So the real facts are, the UN mandated the creation of Israel. The Arabs refused to acknowledge that they had a right to exist and proceeded to fight a series of wars, which they lost. And during this time Israel did not control both areas of the land now in question, and all of these times the other Arab states refused to create a Palestinian state. The irony is comical.
What needs to happen is that the Arab nations need to face up to the fact that they have lost the war, and have all along been holding back any real peace process or any chance at a Palestinian state, not Israel.