I must confess, I am still ignorant... the solution seems simple... if the Palestinians decided to get along with Israel, and used their aid money to build their economy and infrastructure, they would raise their standard of living, and the Israelis would stop seeing them as a threat, and they would build a beautiful little country next to the sea.
What is stopping them from doing this? Its quite clear that Israels security situation is very tenuous given the attitude of the Palestinians twords them... Of course they would be wary.