There was a provisional Israeli government in the land in the late 30's and 40's. Ben Gurion led it. The British allowed it full reign to conduct Jewish Affairs. This provisional government became the legitimate government in 1947.
Israel needs to form a structure for legitimate civilian leaders to arise among the Palestinians by democratic means with whom they can make an honorable settlement.
Israel has tried to do this, but was stopped by the first Bush Administration at Madrid. Israel keeps stating that they do not want to deal with the current Palestinian government, but the US, EU, UN, and Russia keep legitimizing the current Palestinian government and the Road Map says that it is with Arafat that Israel must deal. The only one who disagrees, fortunately, is the President. He says Arafat is gone!