The "should" is dangerous. There is no perfect solution that will make everyone happy and as a result, different people argue for different solutions that put them in a better position than other solutions. It's a complicated situation that probably requires many resolutions over a long time.
As there are several possible solutions, there may be multiple answers.
The Bottom Line is that both sides have a number of important and difficult concessions to make in pursuit of peace and the majority on each side are not willing to concede as much as they should. One of the best proposed solutions to the Israeli-Palestinian Conflict is the Geneva Initiative which provides for a comprehensive resolution of each side's major issues. However, this Initiative requires a number of major concessions from each side, some of which are very painful. See the link below for more information.