I agree with you totally. But its not that easy.
I perceive a major difference in position between the two sides.
While the official Arab position since 2002 goes along the lines of your proposals (the Arab peace initiative http://www.google.com.sa/search?hl=ar&q=Arab+peace+Initiative&meta=), still the general flow of the Arab street runs against normalization with the state of Israel for the obvious reasons. Acts of violence are perpetrated by decentralized factions who do not represent the majority less the official position.
On the Israeli side though the rejection comes from the central government, acts of violence are committed by the IDF following direct orders from the political leadership. While the peace voices are mainly NGO's or weak political parties who do not contribute much in the political process.
How could you match this, when you have controversy on different levels. Hard line Israeli government Vs hardline Arab street. And Flexible Arab governments who find their match in a weak and ineffective Israeli peace camp.
The math just doesn't add up, regardless of how you try to mix and match the four constants of this equation you get a Zero result...
My humble view out of this deadlock is to change the Israeli side of the Equation. Pressuring the Israeli government to accept the Arab peace proposals (through negotations of course and minor accomodations), which is the hardest task, while preparing the Israeli and Arab streets to accept the final status (which is not that difficult after all).
But who could effectively control the Israeli Government and bring it back online, I see no one qualified for this role other than the USA? Which is of course unwilling to discipline its spoiled child and would rather let him do whatever it pleases... paying a few bills for the damage caused from time to time.
So back to square one. What do you think?
Edit to ivri_ankhi: living in denial won't change the reality. I know you wish the Palestinians never existed, but denying their existence won't help you in any way. They are there to stay. If you want to exterminate them that's a totally different issue... I guess Hitler tried it before with the Jews and didn't succeed... History tells that its imossible to exterminate an entire race despite your best efforts. So I guess denying their presence is just childish... it might work though with the gohst under your bed...