Some thoughts that I want to throw on the table. I do not necessarily endorse the following proposal, but I think it is worth considering.
1. Hezbollah is a greater threat to Israel than the Palestinians. Hezbollah is a more effective fighting force than Hamas and other Palestinian militants. Hezbollah has greater capacity to inflict punishment on Israel. Hezbollah takes a harder line on Israel than the majority of Palestinian do.
2. Hezbollah gains legitimacy through claims to be fighting on behalf of the Palestinian cause. Thee continued linkage of the two conflicts helps undermine support for peace among the Palestinian population, as does Israeli operations in Gaza.
3. Israeli objectives in Lebanon are harmed by fighting a two-front war.
Implication: Israel should delink the conflicts by offering full-spectrum, final-status negotiations with the Palestinian Authority while focusing on neutralizing Hezbollah through a shift from a fruitless (and counterproductive) aerial campaign to ground operations. Everything except a right of return should be on the table, and the Israelis should offer to compensate the displaced and aid in the reconstruction of Palestine. They should also make it clear that if attacks are launched from a sovereign Palestinian state, they reserve the right to respond with overwhelming force.
Hezbollah, of course, will try to claim victory by pointing out, not unreasonably, that they forced Israel to make concessions to the Palestinians. Elements within Hamas will continue to reject any peace agreement. But the major developing problem in Palestine is growing radicalization and opposition to peace with Israel, and Israel can work against that by offering concessions. They can rightly argue that while the crisis spurred their decision, they want to make it clear to the world that these are different conflicts and that they recognize the legitimacy of moderate Palestinian demands but not the legitimacy of Hezbollah’s position. It isn’t like a victory by Hamas in Lebanon, which looks quite probable now, will be better for Israel.