The main, over-arching, issue Israel, as a self-described "Jewish state", is facing today is not terrorism or Iranian nukes but demographics. Israel, as the last openly racist state on the planet, considers it vital to keep a Jewish majority within its borders. This is why a council of rabbis gets to decide who qualifies as "Jew" and who does not, and why the so-called law of return makes any Jew on the planet eligible for relocation to Israel and Israeli citizenship (even if this Jews is non-religious, does not speak Hebrew or Yiddish, and does not care in the least about Israel) while those Arabs who were born in today's Israel and who were expelled from their homes and towns are not allowed to return even though such a right is enshrined in international law. The problem is that a full 20 percent of the Israeli population is not Jewish and that the Palestinian birth rate is much higher (both in the Occupied Territories and in Israel proper) than among Jews.
The Israeli elites came up with a two-tiered solution to this issue: first, an Apartheid-like system was set up inside Israel to deprive the non-Jews from most of their civil and political rights; second, Israel withdrew from Gaza and agreed to a "two state solution".
This is what can be called the "Two Walls" policy: the creation of a legal "invisible wall" inside Israel (Apartheid) and the simultaneous creation of a visible wall separating Israel from a series of Palestinian Bantustans under tight Israeli control.
While Israel could unilaterally withdraw from Gaza because it is an isolated and contiguous piece of land in the south of the country, a unilateral withdrawal from the West Bank is not an option: there are too many settlements, "Jews-only" roads, natural resources and military positions in the West Bank to allow the Israelis to leave. A system of Bantustans could ONLY be achieved if an Israeli withdrawal was negotiated with some kind of compliant Palestinian authority willing to do Israel's bidding. Enter Fatah.
Over the years Fatah transformed itself from a liberation movement to a collaborationist force, a kind of "Palestinian franchise of the Israeli Shin Bet". The Fatah leadership is amazingly corrupt, even by Middle-Eastern standards, and more than willing to do anything Israel tells is as long as it is allowed to remain in power. As a result, Fatah and Israel now really need each other: Fatah to remain in power, and Israel to put a Palestinian face to its occupation, of course, but even more so to negotiate a two state solution acceptable to Israel.
For all its other faults, of which there are many, Hamas will never agree to the Bantustanization of the West Bank. So the "Two Walls" policy is totally predicated on keeping Fatah in power in the West Bank at any cost. Should the Fatah regime collapse in the West Bank the entire edifice of Israel survival as a racist state would be at risk.
In this context, the policy chosen by Israel in Gaza is baffling by its boundless stupidity: by totally refusing to deal with Hamas and by blockading Gaza and creating a humanitarian disaster Israel has made the open collaboration of Abbas with the "Jewish state" politically impossible. Things are now getting so much out of control that, according to Arab news reports, Abbas is considering resigning.In contrast, the Hamas policy in Gaza has proven nothing short of brilliant. By overthrowing Fatah and thus freeing Gaza from Israeli control Hamas made it possible for the Palestinians to sustain a campaign of Kassam missile strikes (directed mainly, but not only, against the Israeli town of Sderot). These cheap missiles, which are worse than useless in a military sense, have proven a fantastically powerful political weapon which now threatens to bring down the Abbas-Olmert alliance and, therefore, the entire Israeli plan on how to solve the Palestinian issue.
What an irony indeed, that the most powerful and bloated military and security apparatus in the Middle-East, backed by an imperial superpower, has had its most vital policies totally foiled by homemade rockets which no army in the world would ever want to have, even for free!
How did the "Jewish state" ever get itself in such a situation?! By its boundless arrogance, by its utter contempt for "the Arabs", by its mantrically repeated belief that "the Arabs only understand force" and by its racist delusion that the "dumb Arabs" would never be able to outsmart the presumably brilliant Jewish mind.
Israel is now truly facing an existential threat, at least as the last racist state on the face of the earth: that threat is its own boundless and self-defeating arrogance, further exacerbated by a phenomenally incompetent leadership.
There can be no doubt that Olmert has proven himself to be the single worst Israeli leader ever (the fact that he was ehtusiastically supported by the single worst President in US history did not help, of course). Now that is has become painfully obvious that everything Olmert ever did failed, the situation is becoming extremely dangerous for the entire region.God willing, Olmert and Dubya will just sit out the rest of their time and we can only hope that the publication of the Winograd report at the end of the month will result in Olmert's resignation, although none of the Israeli political leaders likely to succeed him look too promising either (and some look outright deranged, like Avigdor Lieberman).
Alas, a change in leadership and political course in Israel is not something very likely. I consider it much more likely that Israel will re-occupy Gaza. It will be packaged with the usual rhetoric about "self-defense", "anti-terrorism", "restoration of law and order" and "reinstatement of the only democratic and legitimate political Palestinian authority" (Fatah). It is likely to be a bloody, but short operation, supported by Fatah goons who will enter Gaza right behind the IDF and whose return to power will herald a new reign of terror against the resistance to Israel.
Needless to say, that would be as bloody as it would be useless as it would kill any prospects for a "two state" solution negotiated with the Fatah regime in Ramallah which, being even more hated than today, will become as dependent on Israeli forces to protect it as any Jewish settlement.
Olmert is too weak to seriously negotiate, and Dubya is too stupid to put pressure on him (most definitely not in an election year anyway). Hamas will not back down from its highly successful strategy, and Fatah cannot sustain an overt collaboration with Israel in these circumstances. Time is running out, the situation in Gaza is beyond catastrophic and political pressure is mounting on Israel to stop treating Gaza like the biggest open air concentration camp in the world. This is why Hassan Nasrallah is quite correct when he warns that "Gaza has entered a danger circle" and that the Palestinians there "should take extreme caution": an invasion of Gaza is probably imminent.