1)government by the people; a form of government in which the supreme power is vested in the people and exercised directly by them or by their elected agents under a free electoral system.
2)a state having such a form of government:
The United States and Canada are democracies.
3)a state of society characterized by formal equality of rights and privileges.
4)political or social equality; democratic spirit.
5)the common people of a community as distinguished from any privileged class; <link>
Early definitions of democracy proposed by the ancient Greeks labeled it as majority rule and pointed out that minorities did not have the same automatic protections as the majority. Modern accepted definitions of democracy emphasize political equality and rule by common people.
Palestinians do not enjoy the same rights as Israelis in either Israeli proper or occupied territory. Historically, the charade of equal rights was erected by having the distribution of such things as land and aid being coordinated by non-governmental organizations. These organizations would buy up land within non-occupied territory and distribute it to Jews only.
The discrimination is much more pervasive, however, than that. Palestinian farms, villages, water supplies, homes and other structures are routinely destroyed by the Israeli government. I will post one example but it reflects ubiquitous conduct. <link> At the same time, occupied land is being developed by Israeli settlers who get preferential treatment for water, building permits, and access to roads. Funding for schools is distributed unequally. A really good example of differential treatment is how the Israeli government went about building shelters for people who are within range of missiles being fired by Hamas; the government builds shelters for Israelis but not for Palestinians (see Goldstone).
As I wrote earlier, there are working institutions that provide Democracy for Jews in the state, but those same rights do not apply to non-Jews. That is why Netanyahu and other Zionists want Palestinians to recognize a Jewish state.
Another example of how Palestinians are treated differently involved settling the country in 47-8. Palestinians were driven off of their land and out of the country. The land that they lived on was turned over to Jewish settlers. That is unequal treatment based upon religion.
The simple fact is that Jews and non-Jews do not enjoy the same rights any more than Black people did for centuries in America or any more than Black Africans did in apartheid South Africa. People will point out that Israel is settled by people from Europe who took Western traditions of government; that does not mean that those traditions apply to everyone. Actually, non-European Jews were treated disparately by the government for a long time, but they are making great headway in correcting those inequities.
If people actually have equal rights in Israel and occupied Palestine, who are refugees treated differently than Jews? Why can't they go home if Israel is a Democracy for more than Jews?