Looks like there are about 10M population of Israel vs 3M Palestinians in the West bank and 2M in Gaza. (The former number does not include the latter ones, see the wiki link) That would make them badly outnumbered. So it'd still be the Israelis who chose the fate of the Palestinians if you leave it up to a direct democratic vote of everyone in the area of what is currently Israel.
I think a two state solution is ideal. (Though after the attacks I doubt it's feasible) But a two state solution would likely not be able to be entirely democratic, since the majority Israelis would be able to vote for the oppressive status quo.