Is Palestine a state when it is not defined to be so by the UN?
Is Israel a state when it is only recognized by some of its neighbours?
The state of Palestine was proclaimed in 1988, but in exile. Land was granted to the state, by Egypt (Gaza Strip) and Jordan (West Bank), but this was under full Israeli occupation, and parts of these lands were even used to establish Jewish colonies.
Since the peace process was started in 1993, many of the most central state institutions have been established for Palestine: The Palestinian Authority (as it is officially called) controls parts of the West Bank and Gaza Strip, there is an elected president, a government, police, a juridical system and from 1995 even a Palestinian passport (only recognized by 29 countries).
Palestine has diplomatic ties with more than 100 countries (if counting the federal states of the European Union as countries), and the state proclamation of 1988 has been recognized by about 100 countries. There are a group of about 20 countries which has diplomatic relations without recognizing Palestine as a country and another group of countries that have no diplomatic relations despite having recognized Palestine.
More important is that Palestine is recognized by all its neighbour countries, except Israel.
Even if Israel has not managed to be recognized by its neighbours, save Egypt and Jordan, it still has all state institutions, including representation in the UN, an internationally accepted passport and a military defence.
But the borders of Israel remain disputed, especially is this the case for East Jerusalem, which was occupied from Jordan (but later given by Jordan to the Palestinians). It is clear that Israel has all intent of keeping this part of the city, as it houses the last remains of the Temple of Jerusalem.
But Jerusalem's status as capital is not recognized by the international community, and all but few countries keep their embassies in the old capital Tel Aviv. The only ones established in Jerusalem are 2 countries without any importance in international politics: Costa Rica and El Salvador. Not even USA has moved its offices to Jerusalem.
It is clear that Israel is more of a state than Palestine, but at the very same time it is hard to conclude that Palestine is not: While it has not yet been recognized by most Western countries and Israel as such, it is clear that such a recognition will come, and that this will have only formal importance.