For a brief history I would second the recommendation to mideastweb.org. It is about as balanced as one can possibly be, given the circumstances.
As you can see, things quickly get bogged down in details. I will attempt to present a very brief synopsis, from a moderately pro-Israeli point of view. Just for completeness.
Zionism started in the 1880s as a reaction to a wave of European anti-Semitism. The Jews played their cards exactly right with the British, and using the trump card of the Holocaust, managed to get a state in Palestine, even though they never formed the majority. Part of this lies in the fact that Zionism as a nationalist movement was well organized and well politically represented twenty years before the Arabs even began to think about nationalism. Part of it was a bizarre confluence of factors on which the British and Jews had no influence – Stalin and Truman happened to be exceptionally pro-Israeli from 1947 to 1948.
Israel was formed in 1948. She won major wars in 1948, 1956, 1967, and 1973 that were not of her instigation. In 1967, this brought a lot of territory into Israeli hands that was predominantly Arab Palestinian. They had a rapidly strengthening nationalism movement. A notable change happened in 1978, when Egypt was the first MENA country to enter a peace treaty with Israel, in exchange for the Sinai. This treaty has held.
I’m leaving out a ton on purpose here. Refugees, holy sites, terrorism, intifada, Camp David II and Oslo. They are all details which I think obscures the major point:
The Israeli/Palestinian conflict is in effect the same war that has been played out time immemorial. A powerful nation either occupies and comes into possession of a piece of land with nonlocals living on it. The locals start to rebel. Jews have always been the underdog until now, and in some ways it is a taste of their own medicine. What always happens is that the occupying power imagines itself more enlightened and acts on their current social mores. This leads to anything from bloody suppression (Romans and the Jewish Revolt) to limited self government (Babylonians) to complete withdrawal (British).
As much as I am pro-Israeli, I have come to believe that just as in the case of the Assyrians, Babylonians, Greeks, Romans, and British before them, the impetus lies squarely with the occupying power. As much as the locals (in this case the Palestinians) bloody Israeli noses in the occupied territories, Israelis cannot expect Palestinians to suddenly spontaneously develop a peace-loving Western style liberal democracy. The impetus lies with the Israelis to get out of Palestine (the Occupied Territories of the West Bank and Gaza) and either leave them to their own devices or actively help them to rebuild and form a state (like Cyrus did with the Jews).
Since the second intifada began, I have stood by my Ed peace plan. Build a big honking wall. There is a big honking wall around Gaza, and thus very few suicide bombers come from there. There is a big honking wall between Lebanon, and few people sneak over the border. As long the West Bank border is porous as knit yarmulke types commute between their Herziliya offices and their homes in the West Bank, there will be suicide bombers. Qalqiliya people will blow up people in Kfar Saba, Jenin ones to Netanya, Bethlehem ones to Jerusalem. Build a big honking wall and unilaterally withdraw. Get the UN to start an international fund. Resettle a token amount of Palestinian refugees in Israel, financially compensate the rest. Financially compensate settlers wishing to move back to Israel. I’d give them some of the rights of Aliya in order to help with housing costs. The rest of the settlers and hilltop youth can become citizens in the new state of Palestine. Water, electricity, jobs, economic assistance, and further infrastructure will be determined based on Palestinian national behavior.