Yes, diving Jerusalem is important to the peace process as both sides in the issue claim right to the city. If parts of the city were divided among the two, then both would have the satisfaction of having at least part of the city and may be willing to speak to each other in peace.
Jerusalem is important to three world religions, two of which reside near the city. Muslims and Jews should simply learn to get along. Dividing a city is such a Medieval thing in today's contemporary society. There is no need for such hate--the two sides should just get along. This isn't Cold War-Berlin. This is the 21st Century and not the Dark Ages.