speaking as a recent citizen of israel, i'd just like to say that if israel were to fight a war of extermination against the palestinians, it would be over in a matter of hours.
about 7 months ago i was visiting a friend in ramallah for a weekend, right? then just a few israeli tanks and apcs showed up, and suddenly my 2 day stay was a 7 day stay.
militarily, israel is so much stronger than the palestinians that they could walk in and kill every single one of them in a matter of days.
if you think that israel wants to do that, then you are simply wrong. besides, you have no idea how much cheap palestinian labor is used in the israeli system. israel benefits greatly from the palestinian presence.