I don't see any reason why they cannot live together. The division is caused by the governments. Get rid of the governments and let the people form one based on equal rights.
Problem solved.
I think at this point there is so much ingrained distrust and hate that living together would be difficult if not dangerous.
And, from a humanitarian standpoint - the Jews would be a minority. They are a minority that has historically been subject to pogroms, discrimination, and massacres in Europe and in the Mid East. The Holocaust exterminated nearly 2/3 of Europe's Jewish population. That's an incredible number just to wrap your mind around and it's not "ancient history", it's a modern event that remains still in living memory. I don't bring it up lightly or as an excuse, but ask yourself this.
If you were Jewish, would you ever trust your safety, security and life to the majority decisions of a group that essentially hates you? Would you trust your children's future to this new majority? No where else in the world are Jews a majority or even a significant minority. Anti-semitism - while often over used as an excuse - is still very real and rears it's ugly head periodically, usually hand in hand with a rise in Nationalism and economic down-turns where people need a scapegoat.
How would you assure the Jews that they would be equal citizens in a Palestinian/Muslim majority nation? That their lives and property would be safe? That the hatred, empowered by a majority, wouldn't erupt into violence? That they wouldn't be ejected from Israel like they were from Arab countries during the founding of Israel.
There's a lot to overcome and I don't think either side can readily let go of hate, anger, mistrust and myth until they've had time, seperately, to work it out and hopefully establish a pattern of cooperation over confrontation.