Yes, finding a solution to the Israel-Palestine crisis is fundamental to finding peace in the Middle East. The situation in the West Bank etc., has been used in anti-Israeli rhetoric in the past by a number of neighbouring countries, notably Saddam in Iraq long ago. Given his treatment of his own people, the Palestinians are probably thankful he wasn't able to fufill his ambitions. But the point is the same: solve the Palestinian question in a way both sides are happy with (that's the hard part) and you take much of the wind out of the sails of the sabre-rattlers on both sides.
Some Palestinians might be ok with being citizens of Israel if they had equal rights. Others want complete independence. A Palestinian state would need practical infrastructure in the first instance - beginning with a proper airport, as it has no real connections with other countries other than by road and through Tel Aviv airport - and this last has been a big issue when it comes to exporting produce etc., and trying to get all the right permits.

Frank, you mentioned Uri Avnery in Haaretz. Another very good Israeli Jewish writer on the same subject is Amira Hass.