The real story
Let me tell you something about Arabs. They do not negotiate like "western" people. They only understand power. If you are weak, you can be taken advantage of. If you are strong, you are to be admired. In "western" negotiations people comprimise--everyone gives a little for the sake of solving the problem. As soon as you give in a little, the Arabs see it as a sign of weakness and keep on going, demanding even more.
How do I know all this? I live in Israel, in the Western Bank with Hevron the view from my living room window. When Israel was strong, there was peace. Both sides lived their lives. Realistically, there will never be peace to the point where Jews and Arabs live together. This is a "war" that has been going on since biblical times, and no one now a days is going to solve it. The goal, is to live without bloodshed on either side. To be able to travel with out fear.
When ever Israel wanted to retaliate againse an Arab attack, the US would pressure us not to. My guess, is that Bush is concerned about his oil stocks. The Arabs see that their terror attacks are working, and they see weakness from Israel and the US. So they continue, feeling ever stronger. The result? A steady increase of attacks in Israel and 9-11.
Trading land for peace will not work for the same reason. As soon as Israel gives over land, the Arabs see weakness and will demand more.
Don't believe me, look at history.