1. You talk about the " Palestinian people " however, there has never been such a people...It is all an invention. They are Arabs from Jordan and Egypt.
2. Therefore, even if they get rid of the terrorists, which will not work, because of the fact these terrorists not only are in those territories, but from the entire Arab world. For example, Islamic Jihad and Hamas are based in Syria. So even if the territories were "empty" of terrorists, I'll be more would be sent into them after they become a state.
3. The new state, even if it is democratically elected, etc. will be aligned with the Arab world, therefore, defense pacts with other states will raise, etc. and the Arab world will just continue their plans of using that state to finally destroy Israel, because it would now be at its suicidal borders of 1967. Terrorism will restart.
4. But overall, I believe like you, we must give those Arabs an altimatum like we gave 48 hours to the Taliban regime.
Please see this plan by a right-wing minister in Sharon's government: Click here
A plan such as this shows that the government of Israel is serious about dealing with a peaceful people (if they exist) and then allows for the justified acquisition of lands which enemies are using to attack Israel if they don't.