The Israeli military has shown what it can do when someone tries something like Hamas did. The evidence clearly shows contrary to the claims of Likud a micro Palestinian state would not pose an existential threat to Israel. Israel could easily turn such a state into a parking lot again if it tried something like Hamas just did. Once Hamas is disposed I don’t think Palestinians will have as great an appetite or all out war as they did before.
What poses an existential threat is countries like Iran and Turkey not a tiny Palestinian state. If you try to kick out all the Palestinians from the region it will be be used against Israel as political capital against Israel as genocidal state.. in perpetuity. A compromise from a position of strength on the other hand would be viewed as magnanimous. (The only one’s that wouldn’t see it that way are antisemites but they will hate you no matter what you do)