Should they act completely peacefully while Israel maintains settlements and themselves don't honor the agreed upon 1967 borders? Why is it wrong for one side to behave violently but not the other?

I don't condone those Israeli policies, but I don't think terrorist attacks are a productive way to incite peaceful reform. There's no fair solution when one side is much more powerful and cruel with that power, but responding with violence sure doesn't convince people to shake hands.