Well, you have maybe asked the question which is, more than any other, guaranteed to provoke endless acrimonious debate. To be completly honest, from your initial post it appears that you are already far more informed than the vast majority of people because you grasp that neither the Arabs nor the Muslims are a monolithic group and are aware of the internal conflicts that are endemic among them, as well as numerous other subtle points concerning the history of Israel.
I believe that an analysis of the incredibly complex history of the region reveals that Israel is far from perfect, but is still, quite overwhelmingly, the Good Guys, both in terms of their conduct and the overall justice of their cause.
I believe you are broadly correct that the Arab governments do not care about the people who have come to be called the Palestinians per se, but rather view them as useful weapons to point at Israel, which are only useful as long as they are kept in their desperate state. The whole Israel issue is useful for distracting the Arabs from the fact that they live under varying combinations of incompetence, corruption, and totalitarianism. That is not to say that the views of individual Arabs and Muslims who have sympathy with the Palestinian Arabs are cynical, just that they are misguided and often informed by a mistaken view of history and current events.
If you need a good quick overview of the history of the conflict, and don't want to dip into academic texts, I would in all seriousness reccomend wikipedia, rather than anything that is likely to be quickly typed up on a forum such as this. Its coverage of the basics of the history and politics of the conflict is extremely good. If you do want the academic texts, my first port of call would be Efraim Karsh.
I did notice one thing in your post that was slightly curious, and that was the observation that: "Yet there is still a threat of war if the Temple is rebuilt?" This is nothing to do with the Palestinian Arabs per se, and everything to do with the fact that there are two bloody great Mosques, the Dome of the Rock and the al-Aqsa Mosque, that were built on the ruins of the Temple and would need to be demolished, which Muslims in general would not be too happy about.