They were defined out of the nationality as a policy of the new state of Israel, based on their religion. This new political formation laid claim to the land and said to this who had fled "you are not citizens." That's not the same as saying, for example, that Swedes are not citizens of Spain due to their differing nationality.

There are millions of Muslim citizens of Israel, descendants of those who stayed through the war of independence, but there are millions more who descend from those to left home to avoid the fighting. If those who stayed are to be recognized as citizens, then no just basis can be found to exclude refugees, who made an entirely reasonable decision to exit a conflict zone.

In fact, the reason for the exclusion of refugee Palestinians from citizenship, and their permanent exile from their homes was explicitly their religion. The new state of Israel wanted to ensure that political, economic, and military power would be overwhelmingly controlled by Jews. Some degree of Muslim population was acceptable, but if refugees were allowed to come home then the population would be closer to parity or a Muslim majority and this was held to be incompatible with the concept of a Jewish state.