This is obviously a complicated and emotional situation. Without taking sides, I'd like to comment on the history of the situation, as I just completed a research paper based on this very thing.
The idea of a Jewish state orginated with the Zionist Movement during the 1890's (sorry, I forget the date of the first meeting). Although many states sympathized with the cause, it was less than a priority for most and a non-issue for the Ottoman Empire, who at that time controlled the area historically known as either Levant, Judea, Palestine, and now Israel. The Zionist Movement gained a friend in the United Kingdom with the publication of the Balfour Document (@ 1917, IIRC), formally endorsing the possibility of a Jewish state. After WWI, the Zionists gained even more ground, when Britain took control of the Palestine area from the Ottoman Turks. It was during this time that vast numbers of Jewish immigrants moved to the 'Holy Land.' Indeed, it was the flood of Jewish settlers into the area that lead to the first violence, a series of Arab revolts that took place from 1936-1939. In 1939, Britain signed an agreement with the Palestinians that no more than 75,000 new Jewish immigrants would be allowed into Palestine during the next five years, and no more after that.
Of course, WWII changed the situation. During the war, Britain officially opposed more Jewish settlement. However, many Jews (far more than 75,000) fled from the Nazi's into Palestine. After the war, a joint British/U.S. committee was created to determine how many Jewish settlers should be allowed into Palestine. They eventually reached the number of 100,000. Both the Arabs and the Jews of Palestine were upset with this decision. The Arabs were angry because the British had already promised that no more than 75,000 would be allowed since 1939, a number that had already been surpassed during the war. The Zionists were upset because they felt, indeed - it was their policy, that all Jews who wanted to should be allowed into Israel - a number approaching the millions. As the British attempted to keep the peace, violence erupted on both sides. Indeed, the first organized terrorist organizations were Jewish, intent on gaining political independence from Britain. Unable to deal with the situation, Britain turned to the newly established United Nations for help. After months of debate, a resolution was passed in 1947 that called for the creation of two politically independant states in Palestine - one Arab and one Jewish.
The Jewish state of Israel was proclaimed in May (or was it March, I'm sorry, I forget the exact date) 1948, and was immediately invaded by armies from all the surrounding Arab countries. Several cease-fires were called, but few lasted until January 1949, when a final truce took effect. However, during the conflict, Israeli armies had captured almost all the land that had been promised to the Arab Palestinians for their own state. Citing 'security concerns', Israel refused to leave the conquered land. As already mention, the United States was the first to formally recognize Israel, while the U.S.S.R. was not far behind. By its first anniversary, Israel had been admitted into the United Nations. Meanwhile, the Palestinians looked for outside support of their cause, which was the reconquest of land promised them by the 1947 U.N. Resolution.
The next major conflict came in 1967, when Egypt, led by President Nasser, a strong supporter of Arab nationalism, attacked Egypt. However, with abundant aid from the United States, Israel was able to not only defend itself, but captured the Sinai Peninsula from Egypt. During the Six-day war of 1967, Israel also invaded the West Bank, controlled by Jordan, the Gaza Strip, southern Lebanon, and the Golan Heights of Syria. Israel eventually returned the Sinai peninsula, but maintained their presence in the other areas captured. In October 1973, Egypt and Syria launched a cooridinated surprise attack on Israel, which suffered severe initial defeats. However, with increase economic and military aid from the U.S., Israel was able to turn the tide, and drive back its attackers. Again, Israel overran the Sinai. The U.S. involvement in the conflict lead to the 1970's oil embargo and subsequent shortage in the U.S. This, as well as the U.S.'s falling status with Arab nations of the region, lead to its attempts to improve political relations. These attempts bore fruit with the 1978 Camp David Accords, which saw Egypt formally recognize Israel in return for Israel returning the Sinai. Syria soon followed suit, as did other nations of the region over time.
Further peace efforts saw the signing of both Oslo I and Oslo II, where Israel agreed to return partial control of Gaza and the West Bank over to the Palestinian Authority, in return for the latter's promise to change its charter and formally recognize Israel's right to exist. This is how things pretty much stand today.
That is the political history. I am not going to delve into matters such as Palestinian terrorism, Israeli settlement in Palestinian land, the issue of Jerusalem or current P.M. Sharon's right-wing government. I don't think either side would like my views on such things and therefore, I see no need to share them.
Any items I have gotten wrong or forgotten I apologize. Please feel free to post corrections as need be.
All gave some. Some gave all.