The Medrash says whoever tried to make peace with these people end up with embarrassment. The Rambam applied to them the Pasuk ??? ????…??? ??????. The Satmar Rebbe held we should not give it back to the Arabs since that is too dangerous. He held they should Daven for the Medina to end safely.
I don’t think Israel would mind either approach, to annex them or to have another state worked out. The problem is that it’s not what the Arabs want.