The problem is that the predominant view amongst ordinary Palestinian citizens (at least those who speak out in the media) seems to be that they reject a 2 state solution. Not all, but the majority. When they talk about the occupied territories, most of them are referring not only to the West Bank and Gaza, but to the State of Israel. When asked what should happen to Israeli citizens living there, in the event that the land was returned to the Palestinians, the typical response is that they should return to the countries they are from. Many ordinary Palestinian citizens cannot see themselves living in a Palestinian State alongside Israel. Unfortunately, this happens to fit quite well with the views held by many of the current right wing Israeli administration, although for entirely different reasons.
In fairness, there are many historical events that make the view held by Palestinian citizens perfectly understandable, and it seems probable that the current Israeli actions will have done nothing to soften those views. However, it does ignore the fact that there is a long history of Jewish people living in that part of the world, and that many others who moved there were themselves fleeing persecution.
Unfortunately, given the views of both the current Israeli administration and the majority of Palestinians, a 2 state solution seems further away than ever. Whilst the comments from the Israeli Ambassador to the UK were ill-judged and unhelpful given the current situation, she would probably argue that she is just facing up to the reality of the situation.
It is hard to know what the answer is, but the removal of Hamas (if that proves possible) would help, as would a change to a much more moderate Israeli administration.