While Arafat was alive, he recognized the existence of Israel despite receiving assassination threats. Israel awarded his gestures by relegating him to a "no partner" status. As a result elections were held in Palestine and a democracy, not perfect, but still a democratic form of government, was born.
Through this democracy, Palestinians handed over power to Hamas, a militant and social organization in Palestine opposed to existence of Israel. Palestinians found the ruling Fatah party to be corrupt and decided to give a chance to Hamas, sending a message to the world that they should not have to prove that they are a partner to peace. Nor should they have to continue to prove that they are not terrorists as Israel claims them to be. The Palestinians had for the first time exercised their free right to vote without obligation to anyone.
Unfortunately, this decision was not what the Israelis had in mind and as a result it retaliated by holding money due to the Palestinians and pressured the world not to provide aid to Palestinians unless they recognized Israel. It also chose to destroy the Palestinian infrastructure through airstrikes so that the Hamas government would eventually fall.
Whether Hamas likes it or not, Israel is a reality. If the Palestinians need their own nation to call home, the Jewish people deserve the same right as well. Whatever the motives of Hamas are in not initially recognizing Israel, it has come a long ways from being a terrorist/resistant group to a provider of social welfare and now a political force in the Palestinian government. It is more likely that it lacks political experience and would require some guidance as it takes on the responsibility of governing a people.
Until the recent Jewish crackdown on Hamas politicians, there was a cease fire between Hamas and Israel, a sign of genuine sincerity that Hamas could change despite its refusal to give Israel recognition. It would have accepted Israel eventually as it developed political experience and entered the international community. By declaring Hamas as no partner, Israel sent a message to the Palestinians that it has no respect for them or their choices.
Unfortunately, Israel's desire to destroy anything that it doesn't agree with, first Palestinian infrastructure now Lebanese, raises the question if Israel, itself, can be looked upon as really interested in a peace process in the Middle East. In the last six months it has erased Palestinian and Lebanese dreams of developing strong democracies. Combined with the Americans fairing no better in Iraq, hopes of democracy in Middle East are quickly fading.
It is likely that Israel realizes that emergence of other strong democracies in Middle East that eventually produce strong economies could dilute Israel's importance in the region and perhaps in the international community in the long term. By keeping the Middle East unstable, it will likely be the only democracy in that region that Americans, if not the world, could continue to support.