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Well, Israel went to war against Lebanon last year simply over a few captured soldiers, so it obviously doesn't take much for Israel to go to war. Securing the West Bank once and for all would definitely be a good enough reason to go to war. And i don't think Israel is really bothered by possible economic consequences because they know the US will compensate no matter what, and a few difficult years is a price worth paying for a decisive war.
Israeli leaders and Sunni Arab leaders (those from the Arabic peninsula) know that the Jewish colonization of the West Bank is now too advanced for it to ever become a Palestinian state, it's just no longer possible. Both sides ask for impossible things to keep the status quo, Israel asks for the end of the Palestinian resistance, which it knows will never happen, Arab leaders ask for Israel to go back to the 1967 borders, which they know will never happen, the status quo prevents any concrete talks about a Palestinian state which they know can no longer be created.
Sunni Arab leaders have come to terms with the loss of Palestine, the loss of the holly muslim sites is hard to swallow, but they know they're lost, Israel knows it'll have to annex the West Bank, and Arab leaders know they'll have to let it go, both sides just need an excuse for it to happen. It can't happen in peace times because it would be too humiliating for Arab leaders and too much of a breach of international regulations for Israel, but in war times… anything goes.
The current increased tension between Sunnis and Shias and Persians and Arabs offer a possible exit to that status quo, war times create opportunities for unnatural alliances, and the most likely unnatural alliances in a large Middle-Eastern conflict are a Shia Arabs + Shia Persians alliance on one side against a Sunni Arabs + Israel alliance on the other side.
The Shia alliance is a logical one, the religious bond is currently stronger than the ancestral ethnic rivalry between Semitic Arabs and Indo-European Persians.
The Sunni/Jewish alliance is more unnatural but also logical in the current circumstances, first of all because they share a common enemy, the Shias. Sunni Arabs want to put a stop to the Shia expansion, they are much more worried about that than about Israel, and Israel main enemies (Iran, Hamas, Hezbollah) are either Shias or Shia sponsored.
And that's where Israel and Sunni Arabs can find an excuse to get rid of the Palestinian problem. In a general Shia/Sunni conflict, it will be easy for Sunni Arab leaders to point out how Palestinan groups are siding with the Shia enemy. That gives the opportunity for Israel to annex the occupied territories and for Sunni Arabs to let it happen.
In the aftermath of the war, there are no longer any Palestinians in Palestine, the ocupied territories are annexed to Israel, the neighboring Sunni Arabs are at peace with Israel, and the line between Sunnis and Shias is probably somewhere in what used to be Iraq.
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