Ok lets reply to this on a point by point summery.
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First and foremost, both sides will have to accept the other's right to exist. Israel will have to accept that there should be a Palestinian state (which I think it has accepted for the most part), and the Palestinians will have to accept the Israel will exist (which most Palestinians seem to accept, but Hamas in particular does not, which is a big stumbling block). That would go a long way right there.
Israel acknowledged the Palestine state a while back, it is most of the Arab states that refuse to acknowledge Israel’s existence.
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The borders of the two states seems like they should be pre '67 borders, as that's more or less what the world seems to think is fair. That means Jewish settlers in Palestine would need to be moved out, ideally with the option to immigrate from Israel into Palestine and return to their settlements, but that would have to be up to the Palestinians, and if they don't want the settlers, the settlers would just have to swallow that pill. The land simply doesn't legitimately belong to them.
Setting the clock back and redrawing the map is impossible now, much of the territory taken in '67 was taken for security issues, those security issue still exist thirty years later. However did you miss seeing on the news last year that many settlers were relocated and their settlements dismantled? Israel did give back a lot of land and those places are now Palestine, in fact there is a Palestinian town just a ten minute drive from where I live, Israeli's aren't allowed to enter, the majority of Arab towns and villages became Palestinian territory.
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The right of return is a non-starter for Israel, as it would put at risk it's right to exist. A sudden influx of Palestinians to Israel (which is democratic), could cause a political change of an existential nature, so Palestinians just have to swallow the pill that not everyone is going to get to go back to their former homes. That said, the Palestinians must be fairly compensated for land and property lost. I think an unbiased (as possible) third party should be employed to determine the fair market value for all property lost. Israel would be ultimately responsible for making that payment, though I'm guessing international contributions would probably make up a large part of it.
Your right in no way or how would Israel ever allow the right of return to the Palestinians, harsh I know but Tycho summed up the reasons why pretty well. Your right about the Palestinians being compensated if they have proof that their family formerly owned the land or property. (That sound all to like the Swiss banks and I would rather Israel not be compared to those thieves that call themselves bankers.) I'm just wondering who has an odd billion or so to give us to pay the Palestinians.
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Damage from any continued attacks from the Palestinians would have to be covered by the Palestinian government, so that there would be an incentive to stop them. Israel would have to agree to leave policing of attacks to the Palestinians. I think an international third party might be required to help deal with this, as Israelis would likely be very suspicious that the Palestinians were policing their own to the best of their ability.
That is a difficult point because as of now the Palestinians have done no policing of the terrorist unless it is directed internally. One thing the western world has difficulty understanding is the overall mentality over here, the Arab nations tend to have a very macho outlook, Israel can't always allow others to defend our country because if we do it will be seen as weakness and that will be extending an invitation to anyone to attack us, and frankly Israel doesn't always do so well when it does allow others to defend what is ours. On paper having a third party to police things sounds fine but in reality I don't think it would work. Also might I say that this sounds a bit like the peace plan discussed in the West Wing? (TV show if someone doesn't know)
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Both sides would have to set aside ancient and/or religious claims to the land. That kind of question simply isn't something that can be negotiated. If God is really on one side or the other, let Him sort it out Himself. Until that point, humans need to do what they can, and that means not assuming any divine rights that the other side doesn't accept.
Easier said then done unfortunately, personally i would definitely agree to Old Jerusalem, Hebron and other religious hot spots being declared neutral territory, however that isn't taking into account the Ultra Orthodox over here who have a frightening amount of political clout. For those that don’t understand Israeli politics I'll explain briefly, Israel has a coalition government what that means is as follows instead of having two main political parties, Israel has many, anyone can set up a party here all you need is the votes, believe me there been some nutty ones, The Taxi Cab Coalition and the Marijuana Party are just two examples, though I think the Maryjane party actually got three seats....lol
Anyway in the last couple of elections Shas the Ultra Orthodox party has been gaining more and more power, last election Shas came out as the third strongest party, a very strong third, so they tend to vote in a block and no amount of political bribery would get them to give up their claim. These guys are nuts they still cant get over the fact that Mosque of the Rock is where it is, they want to start building the third Temple right now, they were shlapping big rocks up to the gates of Old Jerusalem just this summer. They consider anyone who is not orthodox as non Jewish, hell one of their main religious leaders once said on radio that those that died in the Holocaust deserved it as they obviously weren't devote enough, does that sound like sanity to you?
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Palestinian prisoners who have not already been convicted of crimes would probably have to be returned to the Palestinian government's custody, which probably means set free in many cases. That's a pill Israel will just have to swallow. After the Palestinian state forms, any further criminals arrested in Israel would go into Israeli custody and be dealt with by Israeli law.
That is something Israel is learning to deal with we are releasing them a bit at a time, though we have still haven't gotten back our soldier who was kidnapped a couple of years back.
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I definitely don't like that Israel receives more of our foreign aid than any other country. I think there are many other places in the world (and many places in the US for that matter), that need it more at the moment.
I was wondering when someone would bring this point up, allow me to clear up a few misunderstandings. To my knowledge Israel receives three billion from the US in foreign aid, however there is a condition attached to that money, Israel can only spend that money in the US on American products, so basically America is giving Israel money to help improve the American economy. I don't know if Israel receives more foreign aid then other countries, but I doubt it. America also gives aid to Israel's neighbors, Lebanon, Jordan, Egypt, I'm not sure about Syria, and they used to give aid to Palestine as well, at least that was before the Palestinians voted a terrorist organization into power. Each of these countries ges aid from the US to the tune of two billion dollars each. Now as to who should get aid or not and whether money should be spent on aid or not when there are so many that need help in the USA that’s something that you might want to bring up with your local politicians, just remember it's in America's interest to help Israel be as strong as possible, Israel is America's only real ally in the area, you might mention the Saudi's but they are hostile allies at best, and the people there are not happy about the American presence in their country.
Whew that was a long post, you know there's an old Yiddish saying, get three Jews together and you'll get five different arguments, that very much applies in Israel but it's more like ten different arguments. :)