Before we begin proposing a solution let's enumerate the various elements of the current situation, be they problematic or not, and explain what's wrong with them.
A Partial Palestinian Autonomy in the West Bank and Gaza - there's a Palestinian governing body that controls a large part of the occupied territories directly, and affects the rest of the Palestinians. It is headed by the Palestinian Liberation Organization (or the PLO for short).
Many Israeli Settlements in the Occupied Territories - there are many such settlements, each contain several settlers, and they are all heavily protected by the Israeli armed forces.
Palestinian Terrorists perform many acts of terror against Israelis.
Israeli Soldiers and Settlers are killing many Palestinians.
Israel supplies relief to the Palestinians so they can survive.
Israeli soldiers are protecting the Jewish settlements. This is a huge consumption of resources to the Israeli military.
The Israelis are Blaming the Palestinians. Most Israelis believe that the Palestinians are responsible for the current situation.
The Palestinians blame the Israelis. I don't know that for sure but it seems logical to assume this.