Reason why it is such a mess is because after the initial partition, Egypt and Jordan annexed Gaza and the Westbank and alienated the citizens by not granting citizenship. These then declared war on Israel, and got stomped with Israel taking those areas and Sinai in the peace-deal. Israel since voluntary gave up these lands and Sinai to the respective parties involved.

A solution would be to build settlements in Egypt and Jordan and allow the Palestinians to emigrate to them and be granted respective citizenship. Israel then annexes the Gaza-strip and West-Bank, integrating the remaining citizens. This would be a death-blow to the Palestinian state, but if this is done correctly, it might produce the most ideal solution for everyone involved, even if they are not happy with it.