Given that Hamas will not recognise Israel and encourages the tunnels I feel it would be in Israel's best interests to move the people living right on the border way from the border and create a REAL buffer zone between Egypt and Gaza. Israel should however reopen all crossings and allow food and goods into Gaza. This way both sides get what they want, a lifting of the blockade and a halting of the rocket fire.
If Israel is determined to be rid of Hamas then it should continue the war, otherwise it should totally prevent any arms getting into Gaza but allow the people of Gaza to breath.