Sounds like what I advocated during conversations with my wife only I added the caveat of killing 100 Palis for every Israeli killed in a terror strike. I figured that would strike enough fear into some of those not inclined towards martyrdom to be a little more helpful in stopping the terror attacks...
Steadily moving them back and seeing their space steadliy shrinking will do the trick ultimately one way or another.
They will either be moved to eliminate the terrorists and hasten the creation of their own state, or they will try and strike out at Israel, thus hastening their own demise.