What is the best way to travel around Israel and Palestine?

I was very concerned about renting a car when we went to Israel because most all of the car rental companies are very particular about not driving in the West Bank. And driving around the West Bank can be a much longer trip than driving through it! It turned out not to be much of a concern for two reasons.

1. The highway that goes through the West Bank is well travelled by Israelis and doesn't have access control checkpoints until you get off the highway. So if you aren't actually going into the West Bank and are just passing through, it isn't an issue.

2. The car rental company that we ended up using was an Israeli company and they weren't as concerned about the West Bank as the western brands. Since you are interested in travelling within Palestine, it'll be important that you check with the company to see their policies. You'll likely have more success with a local company than a global brand.

Between major cities in Israel the bus is a very good option. The Egged 480 bus from Jerusalem to Tel Aviv costs about 20NIS and takes about an hour. It runs about every 10 minutes or so. In Tel Aviv you pick it up at the Central Train station.

There are also frequent buses from J-m and TA to most major cities in Israel. Just be careful when traveling between major cities that you get a direct bus. For example, there are 2 Buses from Jerusalem to Haifa, the 940 goes direct and the 947 which stops at every junction along the way. You want the 940! It takes about half the time.

There are also trains through most of the country. Be warned that the train to Jerusalem is very slow, but the ride is really pretty.

As for renting a car, driving threw much of Israel is not a problem. There are a few parts of the Negev you may wish to be careful or it may get stolen. You can't take a rental car into Jordan or Egypt.

As for driving into the West Bank, if you are going into Jewish areas like say Ariel or Efrat it is also not a problem. If you want to go into area A (Including Jerico, Ramalah or the like) you probably can not do so with Israeli licence plates.

We rented a car in Jerusalem and drove along the West Bank (to Ein Gedi), back up to to Tiberius, and down to Tel Aviv. No problems at all, other than being search pretty thoroughly at a checkpoint while going back north (i.e. after driving down the West Bank and back). They were stern but nice, and implied that they were not suspicious of us, but had to make sure nothing had been done to a car while we weren't looking.

I'm not 100% sure but I believe it was a major rental car company - Hertz or Avis perhaps.