Obviously Israel must be able to decide who is allowed into the country of Israel and that means that there must be a hard border somewhere around it, with fences and crossing points etc. As I see it, there are four possible options for approximately where that line might be drawn:
1) Along the River Jordan
2) Along the Green Line but east of Jerusalem
3) Along the Green Line and through Jerusalem
4) Along the Green Line and west of Jerusalem
Which is the best? How do we judge?
I think that the following criteria must form the basis for any evaluation:
1) How successful would it be at ending the fighting?
2) Would it ensure that both sides have their legal rights?
3) How easy is it to practically implement?
4) How easy is it to politically implement?
5) Is it economically and socially beneficial to the individuals most affected?
With those criteria I think that option 2 fares best and here's why.
Placing the border along the Jordan River (1) is simple to implement practically and most beneficial to the individuals since it proves everyone in Israel and Palestine free movement. It may be possible to ensure that both sides have legal rights with some kind of federalised system. However, politically it is extremely difficult and most importantly it will not end the fighting.
A border running through Jerusalem (3) is bound to be difficult to implement and will be extremely bad for the economy of the city. It will end the fighting and should ensure national rights to both sides. Politically, though, there is no appetite for physically splitting the city in two. That goes for international opinion as well. Europeans who celebrate the collapse of the Berlin Wall aren't going to support the construction of a Jerusalem version.
Placing the border west of Jerusalem (4) would not end the fighting, it would only localise it to the city. Everyone inside the city would suffer from economic difficulties and there is no chance of political implementation. Sharing the city would lead to tensions that would probably eventually boil over into outright war between the sides.
If the border runs east of Jerusalem (2) this would end the fighting, be simple to implement practically and be beneficial economically to all residents of the city. Both sides would have their national rights. Politically, it is difficult to implement.
In my view, of the four options only the second one is feasible. All the others present real physical problems whereas the second presents only the challenge of convincing people to accept it.
I'm sure many (maybe most?) readers will disagree and I urge you please to lay out your counter-arguments in the comments or by email.