My understanding of the situation is that much of the Muslim world is intolerant of a Jewish state in its midst and is committed to its extinction, and for as long as that remains the case, Israel will be defending itself from terrorist attacks. That explains what we are seeing today.
And it does feel very much like a Muslim versus Jew thing, as the hostilities spread from just the Palestinians who lost land to much of the rest of the Arab world to non-Arab Muslims who did not - at least initially - to non-Arab Muslims like the Iranians. What's their beef with the state of Israel or reason to form an alliance with the Arabs if not religious/ethnic?
How did they get to that point?
With the help of the West, Jews desperate for a homeland after the Holocaust moved back into their former homeland. The reaction of the locals was that they couldn't live there, and that if they didn't leave, they needed to be exterminated. And it wasn't just the Palestinians living in the immediate region who lost land that took that attitude. As noted, much of the Arab world agreed, and later, other Muslims. These Jews needed to leave dead or alive in their estimation. The attack by Hamas was just the latest manifestation of this irrational attitude that has resulted in several Arab-Israeli wars, airplane hijackings, and suicide bombings.
I say irrational not only because this attitude based in ancient bigotries would be destructive even if successful, but because these people keep attacking a more powerful foe and suffering losses. By now, they should have come to understand that these are going to be their neighbors like it or not and that the ongoing lethal intolerance to their presence will harm them more than their perceived enemies, but they haven't.
Each previous attack resulted in Arab losses including the establishment of what are called open-air prisons. Intolerance -> attack -> loss -> continued intolerance -> continued attack -> increasing hardship and misery. Yet the intolerance for a Jewish state never softens, so how could this turn out any other way?
What's a proper response for Israel to take? Not my call, but I don't see them ever solving this problem, because I don't see the Palestinians ever recognizing that they HAVE to tolerate their unwanted neighbors if they want better lives than living in these compounds and being bombed in them. Whatever Israel does, as long as there are intolerant Arabs remaining in sufficient numbers to commit act of terrorism, the Jews will be attacked.
There are no good answers for the Jews in the face of this unrelenting lethal intolerance. No response they take will end the violence for them as long as there are Muslims that refuse to accept the right of the Jews to a homeland and peaceful lives, or if not that, the fact that they are not leaving and are more powerful.
What would happen if the Middle Eastern Muslims put down their arms and simply accepted that the Jews are entitled to live in Israel peacefully, or, if not that, that there is nothing they can do about it but continue to fight and suffer? It seems that war and terrorism would disappear from the region, and people could all coexist peacefully.
But that's not going to happen, and because of that, this will not work out well for anybody. One doesn't need to take sides. One doesn't need to second-guess what the Israeli response ought to be. Whatever it is, there will be more terrorism or war in the future for them, and more suffering for Palestinians. That's a shame, but it appears that the die is cast for generations to come until the Muslims learn that they must tolerate the Jews however begrudgingly. In the meantime, thousands of Palestinians will die, be maimed, and/or be displaced and subject to assorted privations (food, water, power, homes).
And yes that sucks, but it's a predictable result of this relentless, irrational, tribalistic, lethal intolerance of the Jewish state. The root problem is a failed ideology that persists generation after generation and draws new people into this blood feud. For as long as it continues, there will pain and suffering - more for the Palestinians than either their perpetual target or the Palestinian's allies, who stoke the fire from a distance. And there appears to be no end in sight for this intolerance of Israel's existence.