What are the key issues?
Jerusalem
The city is sacred to Jews, Muslims and Christians. The Jewish Temple Mount and Western Wall are on the same site as the Muslim al-Aqsa mosque, the third holiest site in Islam, and the place where Muslims believe the Prophet Mohammed ascended into heaven. It is important to note that both are in East Jerusalem, the hypothetical capital of a future Palestinian state. This is why Israel was keen to capture East Jerusalem in 1967. This means any agreement would have to allow both sides safe access to their religious sites. It is also significant to note that West Jerusalem has a Jewish Majority while East Jerusalem has a Muslim majority, but that there has been a movement by Zionist groups to move Jews into East Jerusalem. The demographics of Jerusalem explain why an West/East split is envisaged in a two state solution. This however would probably not be accepted by either side. In Israel, the number of religious Jews is growing and the number of secular and Liberal Jews declining, due to the Orthodox community’s much higher birth rate, meaning that they wield ever-larger clout over Israeli government policy. They would not tolerate giving up half of what in their view is an “indivisible capital”.
Settlements and Borders
Religious Jews view the whole of the “Holy Land” as having being given to the Jews by God. They therefore believe they have the right to settle Gaza and the West Bank. Israel captured the West Bank, Gaza, and the Sinai Peninsula in the Six Day War in 1967, and began to construct settlements on this land. It withdrew from the Sinai in 1982 and from Gaza in 2005. Many in the international community as well as the Palestinians believe that settlement building is and was a violation of international law that forbids people from moving their civilian population onto territory captured in war, although Israel disputes this. The settlements are part of the key issue of what the borders of Israel would be in a two state solution- the Palestinians want Israel to go back to its pre-1967 borders, while the Israelis want to keep some of the larger settlement blocks on the West Bank while compensating the Palestinians with land from Israel in return.
Refugees
When Israel was created in 1948, many thousands of Palestinians were forced out and became refugees in the surrounding Arab countries. Today they and their descendants still live in these same places. A second wave of refugees was created after Israel captured Gaza and the West Bank in 1967. After all these years many still hold deeds and keys to houses that they were forced to leave The Palestinians wish for them to be able to return to their houses, many of which are now occupied by Israelis. For the Israelis the influx of so many Arab Muslims would have an unacceptable effect upon the demographics of their country.
Prisoners
Israel holds many thousands of Palestinians in prisons, including many who have killed Israeli civilians. The Palestinians would like them all back, but for many Israelis this would be hard to stomach. The hard-line Jewish Home party is currently in coalition with the main centre-right Likud party, and will not be keen on any mass prisoner release. However, the resolution of the Northern Ireland conflict involved the release of murderers such as Michael Stone; similarly the release of Nelson Mandela was important to ending the conflict in South Africa. A resolution of this dispute may have to involve something similar.
What are the possible solutions?
One-State solution
This solution would involve the creation of one strictly secular state encompassing Israel, Gaza and the West Bank, where all had equal rights. This idea would probably involve some sort of power-sharing agreement akin to the situation in Northern Ireland. Such an idea may seem absurd, but so did the idea of Ian Paisley and Gerry Adams sharing power in the 1980s, or the idea of Nelson Mandela seamlessly taking over from F. W. De Klerk. Despite having some advantages: the issue of Jerusalem would be neutralised for example, it is probably a non-starter. This is because the Palestinians would almost certainly end up as the majority in the state due to their higher birth rates, so would control the direction of the country. This means that the Israelis are unlikely to ever agree to it. There are however some interesting “what ifs” for this solution. Would religious hardliners on both sides come together due to their shared moral values? Similarly would secularists and liberals on both sides unite? Would they eventually split anyway as was the case in Yugoslavia?
Two-State solution
This is the solution which all these negotiations currently aim towards. Despite some of its strengths, we can very well interpret the failure to achieve this solution as being evidence of its weaknesses. Israelis fear for their security in this situation- they worry that Hamas or others would control the new country and use it to attack Israel. There would need to be a level of trust between the two that just does not exist at this point in time.
Now there are many other issues involved, such as the way the conflict has been a proxy war for bigger countries, but let this serve as a foundation for anyone who wants to read more on the conflict.
