While I agree with most of your post, I think you are missing a few things.
A similar mentality seems to be the case with Sharon who wants to punish the Moslems for past aggressions. It is that same school yard "I have to get even or one up on you" mentality. There is no winning in this as niether side will quit till the other is destroyed beyound retaliation.
Everytime peace is tried, it is the Muslims that attack to prevent it! They will never be happy. They want Israel gone. They can never accomplish their goal of pushing Israel into the sea, if there is peace. If that is ever accomplished, they still won't be happy because Europe and the US (non-believers) still exist. Then they will have to move on to Australia, South America, etc. When you say neither side will quit, that is not accurate. Israel has tried to quit a number times, but everytime they do, they get attacked yet again. What are they supposed to do? Just let the attacks keep coming? If they quit, and never hit back, do you think the Palestinians will eventually quit attacking? (Not until Israel doesn't exist.)
The Palestinians have been used as a pawn by the other Arab nations for quite some time. No Arab nations want them, or will accept them into their country, and the Palestinians won't even accept having their own country! (unless Israel is gone).
The US is at fault in that we put ourselves into a No-Win situation
I don't believe this is true. First, the majority of Iraqis are happy we are in Iraq, and they want us there. When the rest of the Arab nations see how much better off Iraq is (assuming this works), and how we helped them and weren't trying to colonize that country, opinions could change. It may not work, but not trying will only give us more of the same or worse (since technology advancements make for better weapons).
As for cutting off the assets they get from us. (money) That would be great. Unfortunately, with all the leftists and environmentalists in this country that force us to buy their oil, I don't see that ever happening until it is too late. Who opposes finding oil in this country? Who opposes nuclear plants?--the some ones who criticize our government for buying their oil, and make us dependent on it.
Rodney