On Sunday morning, the proprietor of a smart but tiny coffee house in central Jerusalem was presiding over a discussion by some of his regular patrons. Most were men in their mid-forties, secular and university-educated. The feeling among this group of Israeli lawyers and accountants was sombre, betraying the usual mix of existential anxiety and condescension towards Palestinians. The discussion revolved around the real and imaginary perils that Israel faces as a result of the Hamas victory in the Gaza Strip. The suffering of the people there barely rated a mention. The role of Israel in helping to create the conditions for a desperate Islamic Bantustan figured even less in the conversation.

"Gaza is a shithole, a death trap and a real hell on earth," said a successful economist. "Our main task is to disengage from these people as quickly as we can. Otherwise we'll get bogged down by their fanaticism and poverty. It's sheer luck we got the settlers out of Gaza. Imagine the head ache their evacuation would have caused right now." His interlocutors nodded in agreement.

Their indifference to the predicament of Palestinians was not accompanied by any empathy with the Jewish settlers. Like most members of Israel's self-styled elite, they regarded both groups as a pain in the neck, an obstacle to the coveted calm (nowadays nobody uses the word "peace" in earnest) brokered by the US administration. Yet, whenever one becomes involved in conversations here about the fate of the Middle East, an air of dejection descends that is far more pronounced than before.

For most well-to-do Israelis, Hamas represents not just another hostile Palestinian group harbouring a profound hatred of the Jewish state; it is a vivid symbol of the threatening Islamic world. A decade of concerted vilification of Muslims has created a sense of collective paranoia in Israel. If the Muslims are out to get us, it is due to something far bigger than the Israeli-Palestinian conflict, the argument now runs. Something more sinister lurks. Talk of nuclear warfare is no longer taboo. On the contrary, the alleged nefarious plans of Iran can be met, accor ding to many middle-class Israelis, only by the nuclear deterrent.

Some of the bewilderment and sagging morale can be attributed to the Second Lebanon War (as it is now officially termed). Last year's botched invasion gave Israelis a sense, for the first time in their country's history, that their armed forces are not invincible. At the same time, it strengthened the quest for leaders with military experience and weakened beyond recognition the already dwindling ranks of social reformers. The defeat in Lebanon - widely blamed on the prime minister, Ehud Olmert, the former defence minister Amir Peretz and the former armed forces chief of staff Dan Halutz - and now the Hamas victory over Fatah in Gaza have restored the old politics of fear.

The immediate response of Olmert, who has hung on against all the odds, was to reshuffle his cabinet, replacing Peretz with Ehud Barak. A former prime minister, Barak had just ousted Peretz from the leadership of Israel's Labour Party. Barak used his short break from politics to make large amounts of money. His return symbolises a broader revival of Labour's wealthy neoliberal wing and the removal of the last symbolic obstacle between Labour and Olmert's Kadima.

As ever during crises, Israelis stay glued to their television sets. Reports of Hamas "atrocities" in Gaza are watched avidly, digested with a mixture of dismay, anxiety, moral superiority - and, above all, pessimism. Stories of summary executions are rampant, only the number of casualties varying from one report to another.

While some public opinion expresses sympathy for the plight of Gazans, the weight of sentiment, on the internet and in newspaper and TV interviews, is overwhelmingly hostile. Here is a sample. Yaacov Amidror, a retired general and leading light of the Israeli intelligence community, wrote in the tabloid Yediot Aharo not on 17 June: "The price for boycotting Hamas will be exacted from the local Palestinian population. But since the citizens of Gaza chose to vote for Hamas, they have no cause to complain." Amid ror proposed a straightforward remedy: Israel should besiege Gaza "for the time being", although there was no immediate need to invade again. Israel should stick to a "rigid, unambiguous position that would prevent any international legitimacy to the Hamas government". Yet even he acknowledged a possible "humanitarian calamity" and suggested that Israel would facilitate international aid to enter Gaza.

This is by far the majority view, but other voices are still heard. Shulamit Aloni, a former minister of education and veteran human rights activist, called on Israeli radio and in Yediot Aharonot for urgent humanitarian aid with no strings attached. She pleaded with the Israeli government to allow free passage from Gaza to the West Bank for Fatah refugees and in the other direction for supporters of Hamas.

Meanwhile, the ever-surprising Maariv newspaper published extracts from the blogs of four Palestinian girls from Gaza, movingly expressing their sufferings and fears. This is an interesting and new phenomenon. That the girls write electronic diaries renders them more human and more approachable to computer-mad Israelis, most of whom, particularly the young, have no human contact with Palestinians apart from the odd person who does menial jobs for them. Equally, most Israelis have only the most perfunctory idea of the extent of the suffering that the encirclement of Gaza has caused Palestinians. The debate is framed almost ex clusively in terms of "terrorism" - which has abated, they have convinced themselves, thanks to the construction of the security wall that now surrounds the West Bank and Gaza. This, as security and intelligence chiefs know, might provide limited protection from individual suicide bombers, but will do little to stop Qassam missiles or other, heavier weaponry from being launched from Palestinian territory.

If Aloni represents the pangs of conscience among "soft Zionists", the rest of public opinion is divided between the Confrontational Category, led by the Likud supremo Binyamin Netanyahu, and the Nationalist Centre, led by Olmert and his new ally, Barak.

Writing in Yediot (also on 17 June), Netanyahu displayed his characteristic view of Middle East politics: "We live in the world of radical Islam and of missiles. This is the gist of the gathering storm around us. Every piece of territory that we unilaterally evacuate is being taken over by radical Muslim forces who then direct their missiles at us under the guidance of Iran." His conclusions - global confrontation with the Muslim world and the end to further territorial concessions, least of all the dismantling of settlements - are ardently supported by the religious parties, the settlers and their friends, and even by some politicians in Labour and Kadima.

The ultra-rightist MK (member of parliament) Aryeh Eldad called on the government to refrain from sending to Gaza "even a single grain of wheat". Such is the mood that Netanyahu's small Likud faction is surging ahead in the polls. The only real difference between Netan yahu and his far-right allies is that he is far more prepared to yield to pressure from Washington, whereas they profess an independent policy.

Despite their personal rivalry, Netanyahu and Barak share similar world views, moulded by military experiences in the same elite commando unit. Barak declared on his first day in office that his main goal is to encircle Gaza and enable passage of basic commodities only. He has adopted Netanyahu's analysis, that Hamas is an Iranian outpost, just as Hezbollah is to the north. Hence the talk of another summer of war, a repeat of the assault on Hezbollah of last August. This time, possibly with even more dramatic consequences, the theatre will be Gaza, as Israel does its utmost to prevent Iranian weapons, especially long-range missiles, from getting into the strip. Hamas's leaders balance the need to consolidate their own power internally with the temptation to strike at the enemy just across the border.

For the moment, the Olmert-Barak government is trying out a new variant of divide and rule, avidly supported by the White House and the EU, manoeuvring between the two very different Palestinian entities that have emerged as a result of the Hamas coup in Gaza. Israel sees opportunities and threats from the events. Some senior figures, such as the respected former Mos sad chief Ephraim Halevy, advocate pragmatic deals with Hamas. Carmi Gillon, ex-head of the internal security organisation Shabak, suggests the West Bank-Gaza split is a blessing in disguise for Israel, in effect seeing off any prospects and pressure for a viable Palestinian state. Israel has signalled that it is ready to collaborate closely with the Americans and Europeans to bolster the Fatah government of President Mahmoud Abbas and his new prime minister, Salam Fayyad, in the West Bank. The hope is that, by improving the quality of life there, they can show Palestinians in Gaza the error of their ways.

And yet, in this configuration, one point is conveniently forgotten. It was largely at the demand of the US, and against the advice of both Abbas and Olmert, that the Palestinians held elections. The January 2006 polls led to a Hamas victory. Again under American orders, Abbas refused to accept the results. Both the West Bank and Gaza were plunged into chaos. Aid and financing were withheld, even after a government of national unity was formed. As living standards plummeted, particularly in Gaza, as corruption grew rife among the Fatah-dominated elite, so Hamas's power base increased.

Now, in a suffocating and small strip of land, with a population that has been trapped and embittered for two generations, this organisation for the first time enjoys political hegemony. Israel and its neighbours have plunged themselves into a new and more dangerous era.

Haim Baram is a writer and journalist based in Jerusalem