Living myself in a multi-national (actually, multi-religious, but, due to outside influence, two out of three religious groups, constituting about 45% of the population think of themselves as different nationality) I can say that it can be hard sometimes. War mood hard, in fact. But this is mainly due to our faulty constitution, which will have to change soon. But it can also be very enriching experience. Mingling and learning other religious practices and customs really broadens your world views. I would give one advice, though: whatever you do, don't install any kind of ethnic voting into your constitution - any sort of bi-national state will have to have a constitution. Make it one person one vote, irespective of nationality and religion. Empowering local communities will ensure that minorities (Jews in Arab areas and vice versa) feel safe, prosperous and have equality. Cantons are also a nice solution, but don't make them into mini-states. Overall, bi-national state is not the end of the world. It was always inevitable.
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Preliminary report: Shooting attack in East Jerusalem's Damascus Gate (Haaretz)
from the article: An unwelcome intro to the binational state