The Arab world will accept Israel as a sovereign state if in exchange Israel retreats to its pre l967 borders. That plan has a great chance to put an end to the insane situation that exists between the Arabs and Israel and bring peace to the region.
Given the Arab penchant for engaging in rocket attacks upon Israel before the ink on the latest ceasefire is even dry, I can't imagine a sane Israeli government agreeing to such a plan.
Moderates in the Israeli government who might be in favor of bending over backwards to force a peace plan agreeable to Arab Street are at a distinct disadvantage as long as Palestinians continue to lay awake nights dreaming up ways to make the Israeli hard-liners' point of view justifiable.