Yep, Heirophant, I agree. If (a big IF) Israel were to give back all the land, then it would have the moral high ground. Better yet, if there were a Palestinian state, terrorist attacks by Palestinians could be viewed as an act of war, and Israel would be justified in responding by attacking an enemy state.
The way I see it, if there were two separate nations, the Palestinians would be faced with having to curtail the terrorism or face a fate similar to Afghanistan's when it harbors terrorists.
THAT just might keep them in check.