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It's based on history, not religion.
It's based on both. The history also includes Palestinians living there simultaneously. In fact, prior to Islam (~700 AD), they were both Semitic peoples. I don't want to say that they were Jews who changed religion, because I don't know that for a fact. But it wouldn't surprise me.
The region was Judea, and Palestine, at different times. Same territory (more or less), different names, same people living there throughout (allowing for the exiles, but those were long ago).
If not for religion, both peoples would probably not have many problems. The Jewish religion (not the Bible, the Torah) says that is the land promised by Yahweh. The Muslim religion says "once Muslim land, always Muslim land". Both of those claims are based in religion, and therefore both are invalid. Historically, both peoples lived there (in relative peace) for centuries. And Jerusalem specifically is a flashpoint because Judaism, Islam, and Xianity have "holy" sites within (Judaism and Islam having the same "holy" site, which is really a problem).**
**The Xians have that one church, and are always getting into fights over which sect cleans what parts...it's really comical.
