You speak about Arabs and Jews as if the two populations don't overlap. 43% of Israel's population are both Arabic and Jewish, the vast majority of whom have roots in Israel/Palestine which are deeper than the Palestinians.
Herzl believed that the indigenous Jewish population in the Holy Land was essential if a homeland was to be established there.
But more on to the root of the whole dispute...Do the rights of 4 million Palestinians trump the rights of 3 million Arabic Jews?
There can't be an independent Palestinian state and peace at the same time.
Any plan has to include ties of dependence between the Israeli state and the Palestinian state--take the EU as a model for this, as the EU has, to this point, prevented another European war and has caused the French and Germans to go from bitter cultural enemies to being the closest allies the world has ever seen.
And, in the case of Israel and Palestine, the dependence has to be equal or else one party can claim to be aggrieved and start a new war.
If you don't have the two sides depending on each other for mundane things, they will never heal their divisions.
France and Germany tied the very basis of their economies together--natural resources--and 50 years later they would never dream of fighting.