> This is, in my opinion, the main reason why Israel has never attempted to annex the Palestinian territories. The Arab majority (or near majority today) that would form in the population would seriously challenge the idea of a Jewish and democratic state - they would be forced to stop recognizing Arabs' right to vote and/or hold office.

For what it's worth Israel could go the federation route - basically, have three largely autonomous federal states, one for Jewish Israel, one for the West Bank and one for Gaza, with the federal government only taking care of finances, energy, water and security, and the rest - including passports and diplomatic relations - be done by the individual states.