The word Palestine was coined by the Romans to mock the indigenous people of the area. After the end of Roman rule the term disappeared until resurrected by the British after the surrender of the Ottoman Empire in World War I. The British Mandate of Palestine was created at that time. There were no Palestinians then- just Jews, Arabs and other ex-subjects of the Ottoman Empire.
The Ottomans were foreign Islamic conquerors and before them there was a succession of foreign rulers in the region going back to Roman times. Until the establishment of the modern State of Israel, there had been no locally based sovereign state in the area; the previous such state was also known as Israel, which was disestablished by the Romans.
No Islamic state; not a single one, regarded Jerusalem as its capital. It is now the capital of the Jewish State of Israel and the last sovereign state (other than the Crusader kings)to have it as its capital was the Kingdom of Israel.
So it was never Palestinian land. There was never, ever a sovereign state called Palestine. No such state exists even now.
Two states were created out of the British Mandate of Palestine. One is Arab and the other is Jewish. The Arab state has the bigger slice of the Mandate of Palestine and is now called the Hashemite Kingdom of Jordan.
Jordan is ruled by foreigners imported by the British. After the defeat of the Hashemite king of Hejaz by the Saudi clan of Nejd, the British gave them the Arab state created out of the Mandate of Palestine.
The Saudi clan conquered Hejaz and annexed it to Nejd to create the Kingdom of Saudi Arabia.
The Hashemite rulers brought with them their bureaucrats and army from Hejaz. The local population, mainly Arab-speaking Christians, were marginalised.
So the Palestinians already have a sovereign state. It is called Jordan. Until 1967, what is now the West Bank was part of Jordan and Gaza was part of Egypt.
The sensible solution to the problem will be for Israel to return the Arab areas of the West Bank to Jordan and Gaza to Egypt. If the Arabs love a word created by the Romans to insult them, then they might as well change the name of Jordan to Palestine. That is the sensible two-state solution of the issue of the British mandate of Palestine.
There is actually an even better, very simple, sane, logical and practical solution to the problem:
End the apartheid, and end the occupation. Give everyone living there equal rights and citizenship, and let them have homes, travel and live where ever they want to.
Also, the state of Israel is another example of foreign rule in Palestine, as its citizenry is composed of Jewish immigrants (and their descendants thereof) from around the world. Most of its prime ministers weren't even born in Israel.
The term "Palestinian" refers to people with family origins in Palestine. "Palestine" actually comes from the term "Philistine", and was given that term in order to disassociate the land from the Jews. Hadrian, the Roman Emperor, renamed the land "Palestine" in his attempted exile of the Jews from it, in the 2nd century, after their failed revolt against the Roman Empire. Before that, it was called "Judea", and was the "Iudaea Province" of the Roman Empire.
Natives in Palestine (like all native people anywhere in the world), for thousands of years, identified themselves with their villages, tribes and languages but not necessarily a nation in the modern sense of the 20th century. The whole concept of nation-states, was something developed by the nationalistic fervor of Western Europeans relatively recently. Arab nationalism was bolstered to counteract the Ottoman empire. Palestinian nationalism is a part of the nationalism and development of new countries all over the previous colonial empires in Africa and Asia (Neither Kenya, Tanzania nor Nigeria, for example, had nationalism as seen today a hundred years ago).