JERUSALEM — In 2006, Israeli director Eytan Fox produced "The Bubble," a provocative film about young Tel Aviv roommates trying unsuccessfully to carve out a rewarding life for themselves as violent realities gradually close in on them.
The three spend their days ruminating about love and politics in the comfort of their neighborhood cafe until Shakespearean events transform one of the roommate's Palestinian lover into a suicide bomber who targets the restaurant.
In the 60 years since its contentious post-Holocaust founding, Israel also has carved out a delicate bubble for itself in the Middle East. Israel has a thriving economy, the region's most lively democracy and its strongest military machine.
But its achievements have come largely in isolation from the surrounding realities that threaten to burst Israel's bubble.
Though it has made peace with two vital neighbors and fought off every invasion attempt, Israel has failed to resolve the issue at the foundation of its creation: settling its seemingly intractable conflict with the Palestinians.
"Israel is a bubble in the Middle East," said Benny Morris, the Ben-Gurion University history professor who authored "1948," a new book on the historic war at Israel's foundation.
"It is nearly miraculous how Israel has managed to establish and preserve democracy out of a people, most of whom came from non-democratic societies," said Morris. "Unfortunately, I would say its future is in peril."
It's no irony that Palestinians refer to the establishment of Israel as "al naqba" — the catastrophe.
Israel has now spent two-thirds of its existence as an occupying power that controls the fate of 4 million Palestinians in the West Bank and Gaza Strip.
The 1967 war and its aftermath have provided ample fodder for violent extremists across the globe, fueled the growth of Islamic hard-line groups such as Hamas and Hezbollah, and served as ammunition for Iranian President Mahmoud Ahmadinejad's repeated threats against Israel.
As Israel contemplates its future, it faces increasingly stark decisions that'll determine the character and direction of not just this small nation of 7 million, but also the broader Middle East .
"The sad thing is that, even at the 60th anniversary of Israel, because of Iran, because of Hezbollah and Hamas, because of Israel's own internal weaknesses, because of the West Bank, the issue arises of Israel's continued existence," said American writer Jeffrey Goldberg, author of "Prisoners: A Muslim and a Jew Across the Middle East Divide," a memoir about his time serving as a guard in an Israeli military prison.
Last month, Goldberg penned a long piece for The Atlantic magazine that carried a provocative cover featuring the Jewish Star of David inked in the colors of the Palestinian flag. Alongside the illustration, the magazine bluntly asked: Is Israel finished?
Goldberg is a strong supporter of Israel who thinks that the dramatic question has to be addressed by new leaders who are willing and able to give up land and help the Palestinians build a stable nation next door.
"It's not too late for Israel to lose the 1967 war," Goldberg said. "It's been a tragic diversion for Israel."
To Goldberg and a long list of Israeli pragmatists, the choice is clear: Hang on to the West Bank and effectively absorb a growing Arab minority that would eventually overtake Zionism's founding mission of creating a Jewish state. Or let go of Israel's Biblically-founded claims to the West Bank and remove recalcitrant Jewish religious settlers so that the land can become a scaled-back version of the Palestinian state once envisioned by the United Nations.
Polls show that most Israelis and Palestinians would accept a two-state solution. But the two sides vehemently disagree on what the borders should look like. And both sides lack a "Nixon-goes-to-China" figure that can break historic taboos.
Israel's dilemma couldn't have a better illustration than the unfolding political scandal threatening to oust Prime Minister Ehud Olmert.
Olmert, 62, has been spearheading new peace talks with the Palestinians under the auspices of the outgoing Bush administration. But his political cachet was damaged by his widely criticized handling of the 2006 war against Hezbollah and a growing list of scandal allegations that have reportedly culminated in an unfolding bribery investigation.
"I think that Olmert is a well-intentioned politician and effective operative," said Daniel Levy, who served as a young Israeli peace negotiator and who now is a senior fellow at the New America Foundation think tank in Washington, D.C. "But it's a real stretch to see Olmert as the person who could carry the public and political world with him."
Israel will have to confront its challenges without the leadership of most of its warrior-statesmen, leaders such as Menachem Begin, who made peace with Egypt, Yitzhak Rabin, who forged a historic nation-building deal with the Palestinians, and Ariel Sharon, the tenacious military leader who led Israel into its ill-fated 1982 invasion of Lebanon and improbably sought to shift strategy at the end of his career by pulling all Jewish settlers out of the Gaza Strip in 2005.
"Most Israelis are most concerned about where the serious leadership is going to come from because things are stuck," Levy said.
Even if Israel and the Palestinians do agree on their borders, few realists think that a deal would assuage extremists who refuse to accept the idea of a Jewish nation in the Middle East.
"Israel is seen as an outpost of the West, and Israel is a bone in their throat," said Morris.
And the wounds created by the last 60 years will not be easy to heal. Both sides can cite a long list of legitimate grievances that make forgiveness and reconciliation difficult.
"I don't think that we can achieve a real reconciliation without solving the practical problems," said author David Grossman, a longtime peace activist whose youngest son was killed in southern Lebanon during Israel's war with Hezbollah. "And I will tell you that even when the practical problems will be solved, first it will take many years until the wounds and the hatred will cure. Many years. Sorry. It can be generations — the trauma is so deep."