Elad, you have a good idea of asking "why can't there be Palestinian Jews, since there are Israeli Arabs?" How about a braver plan: All Arabs in the region can elect a Palestinian President, and all the Jews can elect an Israeli PM. Everyone can stay in their own home and, as long as they don't infringe on the regional councils of the other race, they can build and develop as they please. In an age where people can "telecommute" to their jobs, there is no reason why two "countries" can't occupy the same land, as long as they are willing to accept each other's existence.
Palestinian reportedly shot dead by Israeli soldiers after approaching Gaza border fence (Haaretz)
from the article: Who does not know how to ask?