For more than half a century, Israelis and Palestinians have been fighting over the same tracts of earth. Numerous proposals for dividing the land have come and gone, and none has proved workable. Israel's most recent effort to end the territorial stalemate by pulling out of Gaza and dismantling some of the West Bank settlements has drawn criticism for being too little, too late.

The Israeli prime minister, Ehud Olmert, has outlined plans to finalise the country's boundaries by 2010 - but as long as the Palestinians demand a return to the 1967 borders, few expect the deadlock to be resolved. Given the current downward spiral of violence, the prospect of a peaceful and mutually agreed two-state solution seems further away than ever. But it also makes it necessary for us to think about the conflict in new terms.

In today's world, control of geographic territory doesn't mean as much as it once did. Statehood has become less about territory, and more about access to markets, technology, and the rule of law. What if the Israelis and the Palestinians were able to somehow separate the concepts of statehood and territory and to explore new ways of living together? What if both peoples were given the right - at least in principle - to settle in the whole area that lies between the Mediterranean and Jordan?

I'll admit that it might not be the easiest thing to imagine. When we think about states, we naturally think about borders - real, specific, definable borders that you can plot on a map. What I have in mind is utterly different, and no doubt somewhat far-fetched. (That said, given the failure of all the "realistic" solutions over the past 50 years, forgive me for suggesting that it may now be time to consider other possibilities.)

You might call it a "dual state". Instead of the familiar formula in which two states exist side by side, Israel and Palestine would be two states superimposed on one another. Citizens could freely choose which system to belong to - their citizenship would be bound not to territory, but to choice. The Israeli state would remain a homeland for Jews and, at the same time, become a place in which Palestinians were able to live freely.

This basic administrative structure has worked elsewhere: for example, in the cantons of Switzerland. There people of different origins and beliefs, speaking different languages and with different allegiances, live together side by side. In the Israel-Palestine dual state, smaller territorial units could be given the right to choose which state to belong to, based on a majority vote. At the same time, individuals would be able to choose citizenship for themselves, regardless of where they lived. A person living in a canton that opted to belong to Palestine could continue to be a citizen of Israel and vice versa.

An Israeli and a Palestinian living side by side in, for example, an Israeli-administered area would share many of the same rights and live by many of the same laws. They would both be free to move about within the area now occupied by Israel and the territories. They would share a common currency, participate in the same labour market and contribute common taxes for a number of shared services.

Civil disputes could be settled by independently appointed arbitrators. Parents would be free to send children to the schools of their choice; government funding for education could be allocated on a proportional basis. Neighbours would vote for separate leaders in separate elections, but these elected representatives would harmonise legislation on a number of matters, such as taxation, criminal law and traffic regulations.

There would be no need for security fences or barriers, no need for corridors or safe passages, and no need for checkpoints. A joint defence force could secure the borders, and a joint customs service could ensure one economic space. Both states could keep their national symbols, their governments, and their foreign representation. Local affairs would be dealt with by canton administrators on a majority basis, while individual human rights and freedoms could be guaranteed by the two states in cooperation.

It is not difficult to imagine a Jewish-majority area consisting largely of present-day Israel, plus a number of major settlements. That area would be under Israeli jurisdiction but remain open to Palestinians who wished to live under Palestinian jurisdiction. Similarly, one can imagine a core Palestinian area, consisting of the West Bank and Gaza, and perhaps even parts of Israel where Israeli Arabs are the predominant population. The whole of this area would also be open to Jews living under Israeli law. Jerusalem could be subject to the same principle. The demographics of neighbourhoods would not change overnight - for example, the divisions between East and West Jerusalem would linger for some time - but there would at least be the opportunity for people to move and live freely.

To be sure, the road to such a "dual state" solution would create its own challenges. But, to a large extent, it could build on present realities and proceed one step at a time. Israeli withdrawal from the West Bank, accompanied by the development of credible and lasting Palestinian institutions, could ignite the process. At some point, direct talks about shared economic, civil and defence responsibilities could begin to build the architecture for this new type of state.

Is this proposal completely unrealistic? Perhaps. But present realities are far from sane and sound. There is a crucial need for new thinking if the peace process is to take root. Perhaps by re-envisioning how statehood can exist outside the traditional notions of who owns what strip of land, Israel and the occupied territories can produce the first modern embodiment of the globalised state, where the intangibles of the 21st century can solve the most intractable territorial conflicts of the 20th century.

Such a state would be an innovation in world politics, international law and constitutional design. But it would in many ways be a codification of the new world in which we already live, where our lives are no longer tied to the land in the same way they once were. For Israelis and Palestinians, forgetting about the land may be the only way they will both be ever able to live on it.

Mathias Mossberg is vice-president for programmes at the EastWest Institute in New York. He served as Sweden's ambassador to Morocco from 1994 to 1996 and he has been involved in Middle East peace negotiations since the 1980s.