To cut a very long story on the background of this short, after the First World War, Britain occupied Palestine. During the war, Britain had issued the Balfour declaration, which stated:

His Majesty's government view with favour the establishment in Palestine of a national home for the Jewish people, and will use their best endeavours to facilitate the achievement of this object, it being clearly understood that nothing shall be done which may prejudice the civil and religious rights of existing non-Jewish communities in Palestine, or the rights and political status enjoyed by Jews in any other country.

The Balfour declaration was subsequently enshrined in international law as part of the League of Nations mandate for Palestine, which was awarded to Britain. British policy on the critical question of the scale of Jewish migration to Palestine varied over time and in large part in response to the growing risk of widespread violence between Jews and Arabs.

As early as 1937, a the British Peel commission was recommending an end to the British mandate, and the establishment in Palestine of two partitioned states, one Jewish, one Arab. Following the 1936-39 Arab revolt in Palestine, the British 1939 White Paper imposed quota restrictions on Jewish migration to Palestine and set out a course for Palestine as a unitary binational state. The Second World War then essentially put a pause on the question, though the events of the holocaust made European Jewish migration to Palestine and elsewhere all the more pressing.

After the war ended, the British position in Palestine was becoming untenable. The Jewish insurgency against the British in Palestine, which had been paused as a result of the war, was resumed in full, all the more so because of the aftermath of the Holocaust. Tens of thousands of Jews hoping to migrate to Palestine were interred on Cyprus by the British, who prevented them from going because of the 1939 quotas.

Arguably the highlight of the insurgency was the bombing of the King David Hotel in Jerusalem in 1946, which had been the British headquarters in Palestine. But the overall effect of the insurgency was significant and widespread. The Jews, in particular, well organized, especially after the dismantling of would-be Arab insurgent groups in 1939 before the war.

In 1947, as a result, the British asked the newly formed United Nations to come up with a solution. The United Nations Special Committee on Palestine (UNSCOP) was convened to do just that. Composed of 11 states, it included "no Zionist, Arab or Great Power members" (Morris.)

The proposal you refer to was the minority proposal put forward by Iran, Yugoslavia and India, which would have resulted in a federal Palestine, with autonomous Jewish and Arab entities (which they confusingly referred to as "states".)

The other 8 members of the committee backed what has come to be known as the 1947 UN partition plan.

The majority recommendation of UNSCOP was adopted by the overwhelming majority of the United Nations General Assembly, notably by both the United States and the Soviet Union. The influence of the European Jewish refugee problem, dramatically demonstrated by the SS Exodus Crisis during UNSCOP's deliberations proved to be very influential to the views of UNSCOP, the General Assembly, and in the efforts by Zionists to persuade a committee that the Arabs had thought was certain to back their position. The stated Soviet position backing the creation of a independent Jewish state, likewise proved vital.

In general, the Arabs had rejected UNSCOP entirely throughout this process.

The Arab delegation demand was for "a full-scale General Assembly debate and decision for an Arab-dominated 'united...democratic Palestinian state.'"

While that might sound like the minority recommendation, that too was rejected by some of the most prominent Arab leaders:

"Haj al-Amin Husseini [the Grand Mufti of Jerusalem]...denounced also the minority report, which, in his view, legitimized the Jewish foothold in Palestine, 'a partition in disguise' as he put."

and: "According to Musa al-Alami [one of the most prominent Palestinian leaders], the Arab population would rise up against both the majority and minority reports. In the case of the majority report, the rising would 'command universal support;' as to the minority report, 'the rising might still be fairly successful.'" (both Morris.)

In any event, the point was moot. The United Nations did adopt the majority position, the Palestinians did rise up in the civil conflict phase of the war, and upon the termination of the British mandate of Palestine, the state of Israel was declared and all of the neighboring Arab states launched the 1948 war.

So I guess to summarize, was this notion taken seriously? I mean, sure. It was relatively proximate to the Arab position (though it seems likely they would have rejected that too), but it simply didn't have anything resembling the support for full partition that had the support of both the Soviets and the United States.

Would the Zionists have been willing to accept an Arab dominated federated unitary state? I mean, then we're getting into counterfactuals, but from what I've read of, say, Menachem Begin I would have to say the answer would be no. I don't think such a state would have been tenable.

Sourcewise, most of my quotations are from Benny Morris's 1948, for the background leading up to this I quite like Tom Segev's One Palestine, Complete. For a first hand account of the Zionist insurgency and the motivations of the Zionists generally (albeit, from a revisionist Zionist) Menachem Begin's The Revolt is excellent.

Edit (possibly ninja?): Oh, also, of course the text of the 1947 UNSCOP report, both the majority and minority recommendations, is available here: https://unispal.un.org/DPA/DPR/unispal.nsf/0/07175DE9FA2DE563852568D3006E10F3

The minority report is Chapter VII.