Does this honestly surprise people?
A cycle of revenge on both sides is really the only thing keeping the conflict going anymore. Neither side -or at least, the leaders thereof- wants to do its part to really secure peace; Sharon won't leave the Palestinians alone, and Arafat won't crack down on the militants, because each has been consumed by thirst for revenge against the other side. Hell, at this point, it may even be on a personal level more than anything else; the two symbols of extremism on both sides are at power, and when archetypes fight everyone suffers.
At this point, the only way this conflict can possibly end peacefully will be if both sides come to realize how utterly meaningless it is. The odds of this happenning with the current leaders, however, are depressingly low.