No matter where you stand on the issue, Hamas does have clear language written into it's charter that it intends to destroy Israel, so what can a reasonable person expect Israel to do with a neighbor who wants to totally annihilate them?
That said, Israel does itself nor it's global image any favors by pushing on with more and more settlements.
I think the first step needs to be a complete halt to further Israeli settlements, and Hamas needs to cede it's political position to a more moderate element within Palestine.
Failing that, perhaps Egypt can absorb Gaza into it's own borders, leaving the West Bank and Golan Heights as the only pockets of considerable Palestinian population. The West Bank could be absorbed by Jordan, and Golan by Syria once their conflict has ended.
I know, pie in the sky thinking, but as it stands now, everything is a complete clusterf*ck with no end in sight, and probable worsening conditions in the coming days, weeks, and beyond.