Steve,
Its the wrong question. It doesn't matter what the Palestinians would do, they are not running the show.
The question is what would you do as an Israeli?
and I can say they are doing many things I see as wrong/immoral. But here are two things I would not do, and I don't think you would either:
(1) Give enough of them citizenship that they could or would soon become a voting majority.
(2) Give them enough economic transport freedom to import weapons from Iran.
I am very against the settlements as they inflame tensions but to not advance Israeli security. And I am against the present path for eliminating Hamas because it wont work and has cost too much.
But still I cannot imagine trying to push Israel to do either of the items listed above, yet granting Israeli citizenship would cause the first, and a two state solution as we envision it now cause the second one.
So I will ask you a difficult question: If you were Israeli citizen what risks/certainties would you be willing to accept.
By the way, I think your Omelas analogy is a good one, but just add one more part. Not only does Omelas cease to exist, but some number of its citizen will be killed during its destruction.... then you have a good analog. You can say the citzens of Omelas/Israel are immoral, I will not argue against this position. I am just saying Nations the world over will vote to keep that kid down there rather than dying themselves!