Can one actually declare war on a subgroup of people in a certain country?
If the Palestinians have their own state, Israel could justifiably blame the Palestinian government for any and all hostile actions against Israelis by Palestinian citizens - that'd be an act of war, after all. However, as long as the Palestinians are technically Israelis, I don't see how we can find a legal framework that would allow it.
IF we do find a way of (legally) declaring war on terrorists, it'd solve a lot of legal and moral problems for Israel, but it wouldn't solve the underlying problem, which is that Israel would still be killing poor, innocent, friendly and very Islamic Palestinians (as seen from their side). Israel's opponents wouldn't really care about the technicalities, because they're convinced Israel is evil, which makes everything she does evil, regardless of legal status.
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