I'm very conflicted about the current situation with the Palestinian government. On one hand, Hamas is a terrorist group that has avowed the destruction of the State of Israel; therefore, no dealings whatsoever. On the other hand, elections were held and Hamas was elected by the populace, therefore as a democratic society Israel needs to respect it.
If Israel refuses out of hand to ignore the results what would it say to the whole democratic process? Elections are only as good as the people elected? No, democracy is a process it does not guarantee results.
In 1977 the new Likud Party formed a coalition with DASH and allowed Menachem Begin to become the Prime Minister. Begin is still considered by many to be a terrorist (among those is David Ben-Gurion); what would the Israeli public say if Begin's government was not recognized on the basis that Likud won the majority of seats? This is exactly what we are telling Hamas. We won't deal with you because you're terrorists, but we want you to deal with our government even if you think we're terrorists.
Like I said, I'm very conflicted. But in the end, I think we are obligated to recognize the Hamas government.