Without Jerusalem, there is barely an Israel from a spiritual standpoint. Diaspora Jews do NOT back the settlement enterprise in general, but will fight wherever they are for Israel to be able to keep Jerusalem. That being said, points of sovereignty within the Old City, as well as control over the Muslim holy places, can be granted to Palestinians. It can effectively be the capital of both nations.
Law expanding definition of terrorist activity passes first Knesset reading (Haaretz)
from the article: Israel should give up Jerusalem as its capital