Most of the Pakistanis are not really aware of what are the realpolitik of that region and what are the ground realities there.
Our issue, to be very precise, concise and to the point, the red line that no one should cross, is this:
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The Al Aqsa mosque.
After Mecca and Madina, this is the third holiest place for us. (The one on left). In early times, Muslims including Prophet (PBUH) himself used to pray in the direction toward this Mosque. Our holy book Quran has specifically mentioned this Mosque and area around it as blessed.
This is NOT Palestinian issue, its a Muslim faith issue. For the bold part in your post, that is the crux of the problem. We can ignore the Palestinian sufferings and all, and turn a blind eye, but when you have absolute lunatics ruling over Israel, whose mission is to expedite the return of Messiah, which means only one thing. Not sure if you aware of the ideology and concept in Zionism, but their Messiah cannot return unlit the Temple of Solomon is rebuild. And I am not sure if you are aware, according to Zionists, the Mosque was build over the remains of the temple. So if they have to rebuild it, the Mosque must be demolished. That is my friend, in all probability will trigger the Armageddon, kidding you not.
This is what keep people in Pakistan edgy about Israel and its intentions. So the real problem lies within Israel. Unless these lunatics in Israel are not neutralized, really cannot see Pakistan recognizing Israel.