I agree that if would be very hard to get the American public to support such an idea. Ironically, I don't think our public would be very enthusiastic about the amount of money we already are giving to Egypt and Israel, if they were aware of it. The money going to Egypt is clearly greenmail, and the money going to Israel is building the settlements on the occupied territories.
If the argument could be presented though, as a matter of spending $10B now, instead of spending $5B/year indefinitely, maybe it would get more support.
As for what the Arabs would do with the money... no doubt some of it would be used for terrorism. After all, most Arabs see Israel as an intrusion into the umma, in effect, an American, or at least Western, colony. The parallels with the Crusader kingdoms are too obvious, and I would guess that a lot of Arabs think that Israel should share their fate.
Perhaps the money should be spent on infrastructure in the West bank: roads, schools, hospitals, utilities, etc.
Instead of calling it "aid", though, we would call it "compensation", and have some rough equivalency with what we determine just compensation should be.
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