Unilateral pull-out is not a good idea.
Neither is literally dividing the city.
The city's infrasturucture, services and commerce is too integrated.
A better option is joint administration.
Put together an autonomous city council with elected representatives of 5 geographical wards (2 israeli/2 palestinian/1 mixed) and 2 at large-representatives.
Have a rotational mayor's duties among the city council members (every six months).
The City council hires a City Manager to run the day to day affairs of the city (police,fire, planning, public works, administration etc...)
The Palestinians are probably one of the more incompetent group of people that banded together in modern times.
You can run your own cities with them, if you want to.