It seems clear to me we had a golden opportunity to bring Palestine towards peaceful statehood. When Hamas won the democratic election in 2006 there was consternation in various places, including the ministers of the European Union: could we continue to send development aid to Palestine, now it was run by a group officially designated as a terrorist organisation?
The decision that the EU arrived at was "no", and it was a terrible, terrible mistake. The "yes" option would have supported peace and stability in Palestine, supported democracy, and helped encourage Hamas away from militancy and begun the process of converting it to a civil organisation. (That would never have happened immediately, but it could eventually have happened.) The "no" option means that the EU has effectively joined in Israel's choking of the machinery of Palestinian statehood, meaning that civil institutions can't pay their staff etc. This breakdown directly caused the recent Hamas/Fatah infighting and territorial conflict.
The situation is complex. But what we all want (don't we?) is a peaceful democratic state as the end result. Various militant or terrorist groups have been able to convert to peaceful contexts, but it's never happened by trying to choke off those groups - that only leads to hardening of divisions. Yes, Hamas was officially designated a terrorist organisation, but its strong democratic support in the 2006 elections (winning with 56% of the parliamentary seats), as well as its work in Palestine to improve living conditions, showed its potential to become a civil institution. Yes, Hamas doesn't officially recognise Israel's right to exist as a state, but Israel doesn't allow Palestine to exist as a state, so it's hardly fair to use this as the diplomatic sticking-point.
The USA has trumpeted the ideal of democracy as being a necessary goal to spread throughout the world. Democracy is said to defeat terrorism and militancy; and I do think and hope that's true. This is the one perfect test case: if the US as well as the EU and others had made the promotion of democracy the core of its dealings with Palestine, we could be in a much better situation right now.