Four months after the thirty-four day war between Israel and Hizbollah in July-August 2006, the longest the Jewish state has fought since that of 1948-49, and the only one in which it failed to emerge with a clear military advantage, there seems to be little optimism in Jerusalem.

True, the cast of characters that make up the city remains as lively as ever: returning here after teaching the Arab-Israeli dispute in a seminar room thousands of miles away, you sometimes feel a bit overwhelmed, as if a doctorate's expertise is present in every conversation.

An Israeli waitress, whose parents came from Syria, insists to me that the old Sephardi-Ashkenazi division, which lasted a generation and more after Israel's formation, is for her generation no longer so important. Although her parents are of Syrian origin, she and her peers feel a sense of common destiny with the Jews of European origin, a fact borne out by the school trip she made, as most young Israelis now do, to Auschwitz. "I felt that they had killed my cousins," was how she put it.

She is studying law, goes every day to the gym and, when I tell her I have lived in Yemen, recalls with a broad smile her time in a moshav (semi-collective farm) with her Yemeni boyfriend, where, as in Yemen, the men all chewed the narcotic qat, itself freely grown and commercially marketed in Israel. Her two years in the army, spent in Gaza, were the best of her life.

A taxi-driver, whose family has lived in Jerusalem for generations, regales me with anecdotes about the arrogance of pro-Israeli visitors from the west, who usually get a shock finding their driver is an Arab. He begins by telling me he is not a Palestinian but an "Israeli Arab", though from a part of Israeli incorporated only in 1967 - a further distinction from Arabs whose Israeli citizenship dates back to 1948. Like most Israeli Arabs (with the exception of Druze and Bedouin citizens), the Israeli state "exempts" him from military service.

He may be insistent on his status, but when the driver hears that I had twice met Yasser Arafat - in Jordan (1969) and on his last visit to London (1997) - his eyes light up. He had driven to Ramallah in November 2004 to stand all night with many thousand others to see the helicopter return the PLO leader's body from Paris to the Muqata (Arafat's half-destroyed headquarters).

The parapet at the Mount of Olives overlooks the Old City from which so many TV interviews have been filmed: Mount Zion and the tomb of King Solomon rise to the left, the golden roof of the Haram al-Sharif shines on its esplanade below.

An Israeli tourist guide tells his visitors that it is untrue to claim that the area below them, now including a Jewish cemetery, was once inhabited by Arabs: when Mark Twain came to Jerusalem in 1867, he assures them, he reported that no Arabs lived outside the walls of the city.

If the guide's charges are anything like the Evangelical Christians who inhabit my ersatz-Oriental hotel, he will not have too hard a time making his case. My fellow-guests are obviously not interested in the Israel or Palestine in front of them: they have indeed come to see for themselves how the Jews had returned to "their homeland" and are apparently satisfied, if a little confused, with what they had been shown.

Fred Halliday is professor of international relations at the LSE, and visiting professor at the Barcelona Institute of International Studies (IBEI). His books include Islam and the Myth of Confrontation (IB Tauris, 2003) and 100 Myths About the Middle East (Saqi, 2005).

Fred Halliday's "global politics" column on openDemocracy surveys the national histories, geopolitical currents, and dominant ideas across the world. The articles include:

"America and Arabia after Saddam"
(May 2004)

"Terrorism and world politics: conditions and prospects"
(March 2005)

"An encounter with Mr X" (March 2005)

"Iran's revolutionary spasm" (July 2005)

"Political killing in the cold war" (August 2005)

"Maxime Rodinson: in praise of a 'marginal man'"
(September 2005)

"A transnational umma: myth or reality?" (October 2005)

"The 'Barcelona process': ten years on" (November 2005)

"The United Nations vs the United States" (January 2006)

"Blasphemy and power" (February 2006)

"Iran vs the United States – again" (February 2006)

"Terrorism and delusion" (April 2006)

"The forward march of women halted?"
(May 2006)

"Letter from Ground Zero" (May 2006)

"Finland's moment in the sun" (June 2006)

"A Lebanese fragment: two days with Hizbollah"(July 2006)

"In time of war: reason amid rockets"
(August 2006)

"Lebanon, Israel, and the 'greater west Asian crisis'" (August 2006)

"Fidel Castro's legacy: Cuban conversations"
(August 2006)

" Warsaw’s populist twins"
(September 2006)

"The left and the jihad" (September 2006)

"España: memory for the future"
(6 October 2006)

"Paths of history: letter from Nottingham"
(20 October 2006)

"Robert M Gates: from cold war to long war" (17 November 2006)

"The end of the Vatican" (5 December 2006)

Israelis troubled

On the Israeli side the mood is one of political recrimination and military reorganisation. In contrast to earlier decades of Israeli life, this is a time without strong leaders and personalities, military or civilian. In press and parliament, Israelis continue to dispute who got what wrong in the war itself, and to hold prime minister Ehud Olmert in low esteem ("a lawyer, who was good at telling you how to avoid going to jail, but not a military leader" was how one friend put it to me).

Numerous commissions of enquiry are looking into the technical sides of the war, while military leaders are behaving like clan leaders, each with their own pliant journalists setting them in the best of lights. Binyamin Netanyahu waits in the wings, but he too lacks credibility.

The consequence of Israel's poor performance in the July-August 2006 war has been a hardening of the government position. Olmert, before the conflict with Hizbollah, promoted a supposedly liberal version of Sharon's plan for partial withdrawals on the Gaza model, and talked of evacuating parts of the West Bank. Now there is little discussion of this, on the grounds that withdrawals - from Lebanon in 2000, or Gaza in 2005 - only make Israel look weak in Arab eyes.

In an ominous move, and one that legitimates what had hitherto been regarded as generally unacceptable (or at least unspeakable) views, the Russian immigrant politician Avigdor Lieberman has been brought into the Olmert cabinet. Lieberman says that he wants to apply the tactics the Russians have used in Chechnya to the Palestinians, and forcibly remove Arabs from within Israel itself. Needless to say, he is all for bombing Tehran, a fact of some relevance since his ministerial position is that of long-term strategic planning.

All this Israeli argument and uncertainty masks, however, three other realities that are of longer duration. The first, as an old friend from Haifa is quick to tell me, is that the war exposed Israeli vulnerabilities as never before. No missile-defence system, for example, can protect every town in the north of the country. The showering of hundreds of Katyusha and other rockets on Israeli towns and cities for a month left a deep scar. This was not because of the level of casualties, which were rather low, but because of the helplessness of government and people to do anything about it.

The friend who lives in Haifa told me how the shelters in which people had to spend hours were drab and ill-prepared (his family had one at the back of their flat but had long used it as a storage room and could not clear it out in time). The people under bombardment in the north felt their politicians in Jerusalem and the south had lost the ability to empathise with their citizens. Driving less than an hour each day to work in Tel Aviv, bathed in normality, only accentuated his sense of two Israels.

The second, and more serious, reality is that most Israelis now expect another war, if not in 2007 then in 2008. The phrase "unfinished business" is on many lips, but what this involves is less clear. No doubt the Israelis can refit and protect their tanks and armoured-personnel carriers and train their elite units in new kinds of counter-insurgency, but, as events in Lebanon show, they are not going to destroy Hizbollah as a political and military force. The main aim of the war, to force an international and Lebanese state intervention in the south of that country in order to control Hizbollah, has not been achieved.

The next round

As the current political crisis in Beirut itself shows, this is all because of a long-term problem that no one, neither Syria, Israel nor before them France, has been able to fix, namely the weakness of the Lebanese state itself.

Sooner or later, any attempt to "finish the job" will bring a clash with Syria, and maybe Iran. Israeli's dilemma, like America's, is that if it presses Syria too hard it may undermine the Bashar al-Assad regime and bring the Muslim Brotherhood, the main opposition in the country to power. As for Iran, there is no excluding the possibility of an Israeli air strike on Iranian nuclear facilities, if only temporarily to disrupt, rather than permanently prevent, development of that country's nuclear capability.

It must be assumed also, in the broader regional scale of things, that if Israel is drawing lessons from the summer 2006 war, others, particularly Iran and its allies, are too. And here lies the third, and most important, outcome of the 2006 war: that the strategic map of the middle east, the one with which Israel, the Arab states, the Palestinians and the outside world have all lived since 1967, has now in two ways significantly, perhaps even fundamentally, altered.

First, it is no longer just a matter of conflict between the Arabs and Israel, but of one between Israel and Iran, this latter power now developing a strategy, from Iraq to Gaza, designed to weaken the United States and its allies across the region. Second, the assumptions of that post-1967 epoch no longer hold, of territorial compromise, UN resolutions, the pursuit of mutual recognition, international guarantees. In Iran, and in its allies Hizbollah and Hamas, Israel now has an enemy more resolute, organised and uncompromising that any it has faced since it was established.

Israeli public discussion is much concerned about Iran, almost to the exclusion of any recognition of the much nearer, and more explosive, situation developing in Iraq, which will, if nothing else, directly affect Israel's neighbours in Syria and Jordan and greatly enhance the regional power of Iran. A broader look at the new strategic map shows that Israel has no easy options; and, more immediately, those in the Israeli armed forces who have come into contact with Hamas prisoners and militants see they are up against a much more confident foe than in the past.

This has implications for the internal dynamics of Israel itself. The agreements of the early 1990s gave hope to the more secular part of Israeli society, the liberals of the coast and those in business who have made Israel a successfully economic power. Now those hopes have gone and few seem willing to trust the Palestinians again. "I guess we will have to wait, and go on fighting, for another thirty or forty years before the middle east sorts itself out," as one Israeli academic, who came within an inch of losing his life in Lebanon in the summer war, put it to me.

I could not bring myself to tell him I thought he was being a bit optimistic. Meanwhile, a significant section of Israelis, perhaps 20% or more, have left the country, never quite saying they have emigrated, but somehow not coming back. These yordim (descenders), as Zionist terminology puts it, are, along with the much higher Palestinian birthrate, the demographic pressure-points of Israeli society.

Arabs defiant

Opinion on the Arab side has, if anything, hardened even more. The electoral victory of Hamas and Hizbollah's showing in the war (the "divine victory" as Sheikh Hassan Nasrallah is fond of calling it) have given militant Palestinians a new sense of confidence, even as they have plunged others into despair.

The voices of those who, in post-1967 mode, favoured recognition of an Israeli state and some sort of territorial compromise, are less now: Hamas insists that all of pre-1948 Palestine is a waqf (Islamic trust). Arafat tried to finesse the question of the refugees' right of return at Oslo, but by the late 1990s this had become a major issue again.

This new mood was vividly put to me by an old acquaintance, formerly an intellectual representative of Fatah views, who visited me one day. He was accompanied by a bearded, confident-looking younger man who was introduced as specialist on Islamic political thinking and, in particular, on hudna (the classical Arabic and Quranic word for a "truce", much used by Hamas to suggest compromise with Israel short of recognition).

"Why should Hamas cooperate with the remnants of the corrupt PLO?" he asked me in reference to speculation about a coalition between Hamas and the old nationalist guard. President Mahmoud Abbas was just a puppet of the Americans and the Israelis. As for Hamas, it was, despite Israeli pressure, going from strength to strength. "They have the people, they have the votes, they have the guns, they have the money," he insisted, pointing out that Iran, some Arab states and the Organisation of the Islamic Conference had all promised to help the Hamas government financially.

As if to confirm this perspective, prime minister Ismail Haniya left Gaza for a one-month tour of the middle east, including Tehran. The perambulation may have ended on 14-15 December in disarray and violence on the Rafah border-crossing between Egypt and Gaza, reflecting both internal Palestinian (Fatah/Hamas) divisions and Israel's determination to staunch the flow of "solidarity" funds to the Hamas-led government; but the leisurely pace of Haniya's trip is also an index of how serious his fundraising tour would be, and of how unhurried the movement appears to be about finding a Palestinian political solution. My acquaintance's bearded companion seemed happy to consent to Haniya's line of thinking.

All of which suggests an unwelcome conclusion: that the room for external diplomatic mediation and impulsion is very low. Beyond ceasefires and some alleviation of economic pressure on the Palestinians, neither side seems at the moment interested in a serious compromise. And so, it would appear that, if you want good cheer and good news this coming holiday season, the Holy Land is not the place to start: not this year, and perhaps not for some years to come.