The UN made a proposal where the Palestinians would get about half the territory. But for some reason, they were threatened by other Arabs and forced to leave the area by those Arabs. The Israelis decided to make use of that land since the Palestinians didn't claim it, they were under no legal obligation to give that land in the proposal, it was just a proposal. The Palestinians came back, and the Israelis made an offer that was still generous, but they only wanted to fight against Israel and drive all Israelis into the sea. Israel has been continuously trying to make peace with them and trying to give them enough land to be happy, even though they were under no legal obligation to give them any of their land, and they even pulled back troops from heavily attacked areas in hopes the Palestinians would stop attacking those areas but they kept attacking, so they had no choice but to put those troops back.
The only claim the Palestinians had to the land anyway was a small amount of farmers scattered in the area. Israel believes in the law of return for the Palestinians just as much as they believe in the law of return for themselves, they WANT peace, despite Palestine and their other neighbors working together to try to drive them into the sea, but no matter what they try, the Palestinians won't stop the attacks long enough to talk.
Although in their defense, the people are basically ruled by HAMAS, and if they try to reject them, they will kill them.
Edit: Also, the reason Rabbis are protesting the state is because it goes against the Torah, and they bought into the propaganda.