There has never been a country of Palestine. There was a territory called Palestine. When the Romans conquered Jerusalem in 70AD, they renamed the whole area "Palestine" to shatter the real names of Israel and Judea.
The area remained a wasteland. Nobody lived there. It was finally to become a part of the Ottoman Empire, which the Turks controlled. In the WWI, the Turks, who had sided with Germany, lost their empire to the allies. It went under the control of Britain.
To win the war, a Jew helped Britain by developing a dynamite by the name of Chaim Weizmann. The Balfour Declaration, written by Britain, declared the whole area of "Palestine" to become the new Jewish state, in honor of Weizmann's help. However, certain Arabs complained, scaring Britain, so the end result was that the area was chopped in pieces and the future Israel got a very small piece. We said we'd take it. Something was better than nothing. The rest of the area was offered to complaining Arabs who the British were placating. They did not want it and refused the land offer.
Before 1948, Jews were leaving Europe and the Holocaust and trying to get into "Palestine", and the British decided to stop their entering. But, on May 14, 1948, the United Nations made Israel a state, and immediately, 7 Arab countries attacked Israel.
After one of the attacks, the Arabs were told by their leaders to leave and let the Arab armies do their thing. As soon as they won the war, the Arab population could come back. Instead, the Jews won the war. The Arab leaders kept the Arab population out of Israel and in camps. Even the other Arab countries that surround Israel would not let them into their country. It was like a chess game. They served the leaders' purpose better by being in camps, fed by the UN and gaining support from the world. Israel had asked them (somehow, through bull horns, etc, not to leave. ) Those that did not leave are citizens of Israel, and are even in politics in the knesset. These people have served as propaganda for the Arabs.
This year, we are celebrating Israel's 60th birthday. We've been constantly attack by Arab countries, and yet we exist. More than half of the Arab population living in Israel prefer to be in Israel rather than a future Palestine. They have more freedom in Israel.