Israel was created in a territory that belonged to Muslims and they didn't agreed The Partition Plan in the first place.I think we could agree that mistakes were made by both sides and should talk about what is going on right now instead of what already happened.
The Muslims that lived there were mostly - if not all - nomads. The ones that did have properties and lands, many of them were bought by rich Jewish people like the baron Rothschild.
Another thing, the land wasn't declared as a country or as a land that belongs to a certain group (I'm pretty sure I'm right about the latter, but not 100%). The Muslims that lived in Israel still live in Israel. Palestinians are also supported by Israel with water and electricity, medication (when they can), etc.
The terrorists in Gaza are one of the main reasons why there are still problems. If there will be a palestinian country, it will be a lot easier for the arab countries surrounding it to destroy it (unless Iran manages to nuke it first).