A good chunk of the west bank is under Palestinian administration, just not Hamas. Far from ideal, but has been a lot better than Gaza as near as I can tell.Gaza was to be that. Israel gave it up and evicted Jewish Settlers from it. Both sides need land and water, but there is so little of it to give up. Israel is roughly 411km long by an average of 80km wide. West bank takes up 127km by 54km. If the West bank was given up Israel at its narrowest would be 13.6 km wide. Giving up the West Bank is suicide. As for Gaza, even the Egyptians didn't want it back. They also blockade their border with it as well. Israel has learned that except for Egypt, no good will come from giving up land.
You're touching on my nightmare scenario. If Israel can't concede any land nor nationalize the people living there what are their options? Mass expulsion is a crime against humanity, as is mass imprisonment. How are they supposed to maintain any international legitimacy if they have to resort to that? Without international support how much more vulnerable will they be to extremists? Less brutal than Hamas is a low bar, but Israel is a western democracy and gets held to a higher standard than terrorist organisations. There is a lot of political peril in how they choose to respond.