While it sounds reasonable on the surface, the PLA has every right to be concerned at this demand. The problem is that Israel does not consider their territory Israeli until it has been cleansed of non-Jewish inhabitants, including evacuating Palestinians, Arabs, etc. If Israel were to decide that the currently occupied territories of West Bank and East Jerusalem should be part of the Israeli state, then they would likely be ethinically cleansed also. The percentage of the population of Israel that is Arab is around 20% according to Wikipedia. The population of the West Bank apart from the "settlements" is 100% Recognising Israel as Jewish would also deny any retribution to the Palestinians that have already been forced to leave.
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Gaza education ministry shuts 2 Shejaiyeh schools citing fear of Israeli artillery fire (Haaretz)
from the article: Obama's new vision of Jewish state guarantees rights of Israeli Arabs