Will Israelis accept a sovereign Palestinian state in the region? A clear NO.
Even the 1990s / 2000s two-state solutions were never meant from Israeli side as recognizing full sovereignty of Palestine - it was meant to be more like an Israeli protectorate with its own administration but without its own armed forces, no control over air space etc.
> and will one day drive the Jews into the sea
While many Israelis are eager to drive Palestinians to the sea. (check Daniela Weiss as a somewhat prominent example)
The current government seems to want to ethnically cleanse Gaza. The West Bank has to expect a similar fate, just way slower with expanding settlements.
> but I think it's difficult to claim that the current system is primarily an ethnic or racial one when it doesn't apply to the millions of Palestinians who are accepting of their neighbors
Still apartheid. You can't explain it away so easily.