That isn't accurate. 2.6M are Israeli citizens, they vote etc. Discriminated, yes. But there are laws against that and they are enforced.

3M are in the occupied territories which are technically not a part of Israel so they "technically" don't live in Israel. This is terrible I agree. But this goes both ways. Thanks to the fact that they're not a part of Israel they can become an independent state at some point.

In fact, a lot of what's going on right now is because of the rift within Israeli society which is torn apart about this whole mess.

I'm not diminishing the plight of the Palestinians, but their situation is not a sign that Israel isn't/wasn't a democracy. It is pretty easy for democracies to end up abusing a minority of their citizens. That is one of the central flaws of democracy, tyranny of the majority.