I've been thinking about the issue in terms of (armchair) game theory:

Ostensibly, both parties essentially claim to be playing a a tit-for-tat strategy in an interated prisoner dilemma where the other party is a DefectBot that can't be cooperated with.
Who played "Defect" first and when is a matter of dispute: arguments usually involve to events going back to at least the British Empire, if not the Ottoman Empire or even the Roman Empire.
Regardless of who started it, both parties think (or at least claim to think) that they can't break the defection cycle by attempting to cooperate unilaterally, hence they defect.

Obviously this analysis is simplistic since it models the Israeli and the Palestinians each as a single agent. But since, as you say, Palestinians tend to more or less unwillingly support Hamas and the Israeli tend to support Netanyahu and his coallition government (also more or less unwillingly?), I think this two-agent model is a reasonable first-order approximation.

Another issue is that there doesn't appear to be a Schelling point that both parties recognize as a "default" solution for the bargaining problem they face. It seems that both parties operate under a framework of "This land is ours. You have no right to be here. Anything we might concede you is more than you deserve and you'd better be grateful and accept it without question before we change our mind."
This isn't conducive to productive negotiation.