Well, the big question is how this happens. The Zionist settlers were definitely pushing for their own state by 1948 so it seems very unlikely that they will simply not declare a state. Making them lose the First Arab-Israeli war is easier though. Unlike the other Arab-Israeli wars, the Arabs actually held a qualitative advantage over the Israelis, but this was mitigated by the fact that the Arab command suffered from a critical lack of unity due to the different objectives set by various Arab leaders (indeed, Jordan was not looking to extinguish Israel at all, only to secure its hold on the West Bank). Suppose that the Arabs either come together to genuinely try to set up a Palestinian state, or at least agree on a definitive partition.
As for the Middle East in the long run, it will be quite greatly changed. Jewish communities are likely to continue to exist, albeit in reduced form, as the strong growth in Arab antisemitism that followed Israelis victories in the First Arab Israeli war and the Six Day war doesn't happen. What happens to the Jews in Palestine itself is another matter. While some have claimed that an Arab massacre of most of the Jews living in Mandate Palestine would follow an Arab victory, it seems to be more likely to me that a mass expulsion, with a few high profile massacres taking place is more likely. Think up to a few thousand Jewish civilians being killed. The question is what Europe's reaction to the whole war is.