Redstate.com has an article, "Newt Gingrich Tells the Truth About the Palestinian Non-Entity," that quotes this revealing statement by PLO Executive Committee member Zuheir Mohsen in 1977:
“The Palestinian people does not exist. The creation of a Palestinian state is only a means for continuing our struggle against the state of Israel for our Arab unity. In reality today there is no difference between Jordanians, Palestinians, Syrians and Lebanese. Only for political and tactical reasons do we speak today about the existence of a Palestinian people, since Arab national interests demand that we posit the existence of a distinct Palestinian people to oppose Zionism.”
So the reason for maintaining the fiction that "Palestinians" are a sovereign nation entitled to some territory is merely a political ploy with the long-range goal of grinding down the State of Israel.
UPDATE: Additional proof that former Speaker of the House Gingrich has struck a raw nerve can be found in a BBC article that mentions the Arab League lost no time condemning his statement about Palestinians being an "invented people" and "terrorists."