I find the options odd. "Palestine" isn't a real nation. They're Arabs. Calling the Palestinians a nation would be like calling Iowans a nation. They aren't a nation, they are a part of a larger nation, which is exactly why they moved so fluidly to become citizens of Trans-Jordan and then moved back. But really, it's a crappy problem. I don't like what the Israelis are doing, but short of asking nicely or offering financial incentives to get them to cut back on the settlements, just about anything we do would make it worse. We'd do far more harm than good. Israel isn't an ideal ally, they aren't doing what we want allies doing, but they're in just about the toughest spot in the world. All one has to do is take a look at a map of the Middle East, consider countries in the past which fought wars to eliminate Israel, hear Arabic rhetoric against Israel (namely coming from Iran), and then consider Israel's position.
There is no possible solution if the Arab and not Arab countries of the area don't recognize the State of Israel. Israel is not a "Crusader State" [like it happens to hear around], Israel is a state nation which exists there and it will remain there. So they should put their heart in peace about this point. Once accepted the existence of Israel, all the negotiations about borderlines, settlements, economical agreements ... will be well more possible to run and with some real possibilities of success.
Israel is an ideal ally because we fighty one of humanities greatest enemies; terrorism. and we protect our people from the palestenians, one of my mens brother was murdered by palestenians. We only do whatever it takes to protect our people.
Israel had a real opportunity and a sweet deal when the Arabs capitulated in 2002 and offered to guarantee Israel's security.