The only way to ease the tension. The Palestinians already believe in keeping the land they previously had and Israel wants some of it too. Making a separate state for Palestine might solve a few problems and ease the friction, but the peace wouldn't last that long. The Palestinians have been through a period of depression and occupation long enough.
The reason many Palestinian people commit acts of terrorism is because they are sick and tired of being abused, occupied and mistreated by Israel. The government of Israel builds illegal settlements on Palestinian land, demolishes Palestinian homes and kills innocent Palestinian civilians. If Palestinians were given the basic human rights that every good human deserves than less terrorism would occur.
The truth is that responsibility comes from being responsible. A dependent, occupied people will always be vulnerable to the manipulation of extreme elements within that population, because there is no investment in the current situation. The reason we believe the middle class brings stability is because the middle class has a large part of what it needs to be happy, as well as opportunity to improve. It also has a lot to lose. Statehood creates opportunity and allows a middle class to develop--which means people have something to lose, and will resist the extremism that can be found in any culture.
Palestinian statehood is one way to end the Israeli-Palestinian conflict, and it may be the best one. However, it's far from the only one. The outright of destruction of Israel is another way to end it, or the utter crushing of Palestinian resistance. These approaches will of course bring far more suffering than statehood, but they do exist, and radicals may try them.
Palestinian statehood isn't the only answer to peace in the Middle East. The Palestinians and Israelis can learn to live together in peace. There is nothing wrong with sharing two religions. Jews and Muslims can share sacred ground without bloodshed. There is no place for ethnic cleansing in a modern world. Apparently the Israelis and Palestinians haven't learned from World War II, Yugoslavia or any modern civil rights movements.
Against the advice of the United Nations in 1948 the Arab world made every effort wipe the nascent state of Israel off the map. They lost. Further they lost again in 1968 and again in 1973. Actions have consequences. The Arab world is wrong to deny the Palestinians a place in the aggressor countries of Jordan, Syria and Egypt. They causes the displacement and should bear the responsibility of adapting to the results of wars of aggression fought and lost.