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In an interview with Italian state television RAI's TG1 news channel, Francis also said he hoped a regional escalation could be avoided in the conflict that began when Hamas militants entered Israel, killing some 1,400 Israelis, mainly civilians, and taking about 230 hostages.
"(Those are) two peoples who have to live together. With that wise solution, two states. The Oslo accords, two well-defined states and Jerusalem with a special status," Francis said in an interview with Italy's RAI broadcaster.
In 1993, Israeli Prime Minister Yitzhak Rabin and Palestine Liberation Organisation leader Yasser Arafat shook hands on the Oslo Accords establishing limited Palestinian autonomy.
U.S. President Bill Clinton, Israeli Prime Minister Ehud Barak and Arafat took part in the Camp David summit in 2000, but failed to reach a final peace deal.
Israel captured Arab East Jerusalem in 1967 and in 1980 declared the entire city its "united and eternal capital". Palestinians see the eastern part of the city as the capital of an eventual future state.
Israel has consistently rejected suggestions that the city, which is sacred to Christians, Muslims and Jews, could have a special, or international, status.
"The war in the Holy Land frightens me," Francis said. "How will these people end this story?"
An escalation, he said, "would mean the end of so many things and so many lives".
Francis, who has called for humanitarian corridors to help Gazans and a ceasefire, said he speaks by telephone every day to priests and nuns running a parish in Gaza that was sheltering about 560 people, mostly Christians but also some Muslims.
"For now, thank God, Israeli forces are respecting that parish," he said.
He also said that he was concerned about the rise in antisemitism, adding that much of it still "remains hidden".
The war between Israel and Hamas, he said, should not make people forget other conflicts, including in Ukraine, Syria, Yemen and Myanmar.
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