Nothing really new here. The Arab League peace offer brokered by Saudi Arabia is based on exactly those terms, and was available since before Hamas was elected into power. Hamas has been offering Israel a truce (but without formal recognition) for a couple of years now, and Israel has ruled out (and continues to rule out) any negotiations with Hamas unless it first recognizes Israel.
As to Hamas's credibility, it doesn't matter. What matters is that they control Gaza. Credibility or no credibility, that gives them a seat at whatever negotiating table may be set up.
The real irony is that "everybody" understands what the only solution that just might lead to peace there is -- something based roughly on the 1967 borders, with territory swaps so that the biggest and best established settlement blocs get annexed by Israel, and the Palestinians get an equivalent amount of land in return (or at least enough that whoever on their part accepts the deal can argue that it's equivalent).
However, I don't see it happening, simply because all sides are so deeply dug into their foxholes: Olmert doesn't have the moral or political authority to beat the settler bloc into submission and make them swallow the "painful concessions" involved (though Sharon might have), Hamas is very, very unlikely to agree to formally recognize Israel, and Israel is very, very unlikely to ignore Hamas's lack of formal recognition for it.
The Palestinians and Israelis are pretty much like two punch-drunk fighters leaning on each other, but neither quite falling over. The only way out that I can see is if there's a radical political shift on the Israeli side -- the Palestinian side is so fragmented and lacking in both political leadership and state structures that any political shifts on their side will make very little difference.
IOW, I remain pessimistic. But I really, really hope I'm wrong on this one.