There can, and should be a two-state solution. This would require Palestine to be fully independent of Israeli control (not like the full border/airspace/sea control Israel imposes currently). It would also require a viable Palestinian territory--not a bunch of Pali islands scattered between Israeli checkpoints in the West Bank.
Palestine can keep Gaza as a port and smaller population center, while many of the Gazans can live in the West Bank. This would, of course, require acceptably free movement of goods between Gaza and WB, which would be difficult to pull off.
The biggest hurdle is for the Israeli government and Israeli extremists to recognize the Palestinians as living, breathing human beings who deserve life, liberty, and prosperity. This hurdle, in my opinion, is what has been fueling the conflict all along.
There are crazies in the United States, but the vast majority do not identify with them nor support them simply because a vast majority of Americans are doing... OK. Why would a typical well-to-do middle-class person hitch up with a nascent Commie terror cell full of flunkies when they don't have much to complain about and can look to a better future? If you want to say that Islam will still push all Palestinians toward terror, I will take your word for it, and disagree.
Of course, folks like OBL are well-to-do, and hitch up with Islamic terrorists. I firmly believe that this is because they're fucking bat. shit. crazy. psychopaths, and most people are not psychopaths.
The Palestinian extremists will have to return the favor, because they would lose all support if they spit at a reasonable and humane two-state compromise. If there is nothing to bitch about, I truly believe that the common Palestinians will go on with their lives, better themselves, and reject extremism. At the moment, they are broken and indigent.
This can even be seen when you compare Pali's in WB and the Pali's in Gaza. People in the WB, at the least, are employed. Gaza, on the other hand, is an open-air prison. Where is the violence coming from?
Israel can become a place where Palestine is a boon, not a bane. Unfortunately, both parties in the conflict will have to bite their lip very hard and work through this with mutual respect.
I'm a fucking dreamer, aren't I?