1) Give them their own state. This is difficult for quite many reasons, and Israel (by which I mean the current government) doesn't want that
2) Give them full citizenship rights equal to Israel's citizens, make sure they have a proper minority representation, and let them participate in the regular political processes. The current government certainly doesn't want that, and I have no idea what part of the Palestinians would want that.
3) Continue to treat them as sub-human, and deal with the consequences of the hatred that fosters. That seems to have been the "strategy" before October last year.
4) Try to exterminate or exile them, or at least decimating them to such an extend that the problem becomes smaller.
Since 1) and 2) are (again, from the perspective of Isreal's government) undesirable, and 3) has stopped working, 4) seems to be their current strategy.
As the Palestinians are the majority, the Jewish Israelis would become a minority in terms of citizens and votes. This is very much akin to Apartheid South Africa, where a minority ethnic group rules over the rest of the population.
Although there remains the case of 700,000 Palestinian refugees who (in the hypothetical scenario of a unified state) would tilt the balance further if allowed to return to their/their parents homes or given property as compensation for repossessed homes.