The conflict between Israel and the Palestinians is one that has destabilized the entire Middle East region. Popular anger towards Israel because of its occupation of Palestine and the human rights violations inherent in that occupation, is sky-high and rising. Regional governments, themselves facing serious crises of legitimacy, have to balance their people's rage against demands from the U.S. to maintain stability and some level of normal relations with Israel. Because most Arab regimes are so dependent on the United States—either economically (like Jordan), militarily (Saudi Arabia, Kuwait, Qatar), or both (Egypt)—they have little choice but to accede to Washington's wishes. But doing so further isolates them from their people, and raises the risks of instability and potentially even being overthrown.
An end to Israel's occupation will immediately reduce tensions and instability in the region. The establishment of an independent Palestinian state and its normalization of relations with Israel as well as with surrounding Arab states will set the terms for regional normalization of ties with Israel, further easing Middle East tensions. Certainly many problems remain; Israel's economy is many times larger than that of the surrounding Arab states, setting the threat of increasing inequity as the basis for regional economic cooperation. The "new Middle East" might look unfortunately similar to the "new North America," in which free trade agreements end up further enriching the U.S. behemoth, while the much smaller Canadian and especially the relatively tiny Mexican economies pay the price.
But such developments are not inevitable. The potential remains for democratization and efforts for regional advancement as the trajectory of the next century. But all of that must wait till an end to Israel's occupation.