Could the solution be something like Belgium? That is, a relatively powerless (con)federal assembly to oversee things and solve disputes; and two powerful legislatures to run both Palestine and Israel and their respective ethnic communities (+ one more for Jerusalem, like Brussels is currently run) in their own way.
Don't see how this would solve, say, the problem of the settlements.
I think the long-time hatred between the two groups are far too powerful for any "Belgian" solution to conceivably work, at least for the foreseeable future. Still, any other proposed solutions seems just as unrealistic...
