Let us get one thing straight here, since most people here aren't really taught history these days.
For the person who said that they have been fighting for 2000 years, you are wrong. The Romans got so tired of dealing with the Jews that they relocated them to other parts of the empire, then sacked Jerusalem. There were not many Jews in Jerusalem until after WWII.
The Middle East, during that time, has been raided and captured by many different groups, but the Ottoman's were able to control it for a few centuries, before they lost the territory after WWI. The British and French divided the lands among themselves.
After WWII, The US worked with the UK and France in order to setup a home for the Jews, and that is how the state of Israel was born. Oh, and that land was technically owned and controlled by the UK and France (spoils from the first world war, remember).
Now, as far as this "illegal occupation" goes, you really need to decide if starting a war with Israel was "illegal." Israel, by the way, won that war and kept a lot of the land that they captured. Nothing illegal about that. Hell, one can argue that North and South America are being illegally occupied, a lot of Europe as well, even many parts of Asia and Africa. If capturing territory and residing on it is illegal, then good luck trying to enforce that on all the countries of the world who have land because of past victories.
I have no horse in this race, and I think the fact that we fight over it, mainly based on what our political party of choice backs, is an affront to the people who live there. We constantly are making things worse, not better, because of our crappy politics (and the amount of money that is tied to political activism). I have sympathy for the Jews, Muslims, Christians, (in essence, everyone that lives in that region). They are pawns for our (and other countries) political gains.
VGPolygot, none of the solutions that you mentioned will work. They are all designed for the betterment of other countries political ambitions, not the people in that region. If any of those are actually implemented, then there will be new fighting for something else in the region, that will use hatred and fear to keep that long running battle going (political activism, is big business). Best thing the world can do is get the hell out of there, take the money out, and let those two sides work things out. There is no problem with Muslims being a majority, or Jews being a majority, we just make that a big deal. The important thing is that they provide opportunity for all citizens, regardless of religion, race, etc. Funny how everyone holds America to that standards, but then expects the rest of the world to be segregated.
No easy solution, just let the parties involved work out their differences. If they feel the need to fight a war, so be it, but I would assume most people there do not want that (except for the terrorist organizations who are getting good money to do so, and also they don't want to lose their power).
Also, people need to understand, that historically the Muslims that ruled the countries in the Middle East allowed non Muslims to live there and be citizens, but, non Muslims didn't get the same benefits are Muslims did. They weren't persecuted though. Funny, how times and the world have changed.