Veteran Israeli leftist Haim Hanegbi wrote in August 2003:
I am not a psychologist, but I think that everyone who lives with the contradictions of Zionism condemns himself to protracted madness. It's impossible to live like this. It's impossible to live with such a tremendous wrong. It's impossible to live with such conflicting moral criteria. When I see not only the settlements and the occupation and the suppression, but now also the insane wall that the Israelis are trying to hide behind, I have to conclude that there is something very deep here in our attitude to the indigenous people of this land that drives us out of our minds.
There is something gigantic here that doesn't allow us truly to recognize the Palestinians, that doesn't allow us to make peace with them. And that something has to do with the fact that even before the return of the land and the houses and the money, the settlers' first act of expiation toward the natives of this land must be to restore to them their dignity, their memory, their justness.…
-- Cry, the beloved two-state solution; Ha’aretz, 10 Aug 2003.
I think I’ve found an example of the madness he is talking about. The following poem was published pseudonymously in Israel’s leading Russian language newspaper, Вести (Vesti), on 25 Aug 2005, in support of Avigdor Lieberman’s proposal to rid the Jewish state of its citizens of the “wrong” religion by transferring the Arab villages of the Galilee to the Palestinian Authority. (Translation, and all errors therein, by Lawrence of Cyberia):
Парадигма Либермана / The Lieberman Paradigm
А ягодки – кошмарный сон: число израильских арабов
зашкалило за миллион и далее растет не слабо.Their progeny are a nightmare: How many Arabs in Israel?
Already more than a million there, and still growing, right off the scale.
Взгляни на них – темно очам! Скажу, евреям не в обиду:
Арабы пашут по ночам Во имя восполненья вида.Just look at them – they blacken your sight! I say this without reproaching the Jew:
The Arab is ploughing his furrow by night that his race might outnumber you.
Затменье лунного луча, Дыхание смерти, след напасти?
Крольчиха, кошка, саранча Не ведают подобной страсти!A lunar eclipse? Does that explain it? Is it the mark of misfortune? Is it death’s kiss?
Even the cat, the locust and the rabbit are unfamiliar with lust like this!
И как ты счастья не пророчь, Уже нам путь мостит ко гробу
За ночью ночь, за ночью ночь aрабской женщины утроба.There is no happy end in sight. They are paving the path to your tomb,
Night after night, night after night, in the Arab woman’s womb.
- "Гершона Бен-Яакова" / "Gershon Ben Ya'akov"
That’s nice isn’t it? The Arabs among us are breeding like vermin. It sounds like a scene from The Eternal Jew. It’s hard to credit that only two generations after that nauseating film was made, an Israeli newspaper would see fit to publish comments like that about a religious minority in its midst.
And Haim Hanegbi is right, it is madness. It really isn’t normal or healthy to be obsessing like this over how much sex your neighbours are getting. And if The Lieberman Paradigm is a symptom of the madness, I think its fundamental cause lies here, in the preface to the British Census of Palestine (1922), which summarizes its findings about the population thus:
[S]ome 590,890 (78 per cent) were Muslim; 73,024 (9.6 percent) were Christian, mostly Arab although some British and other European were included; less than 10,000 (1 per cent) were Other; and 83,974 (11 per cent) were Jewish. Of the latter, perhaps two-thirds were European immigrants and their offspring…
- cited by Edward Said, The Question of Palestine (Vintage Books Edition, April 1992; p.17)
The Palestinian people are the I/P conflict’s ultimate fact on the ground. And they are the one reality that a Zionism which equates a “Jewish homeland” in Palestine with gerrymandering a perpetual Jewish majority there cannot come to terms with. You can invent all sorts of justifications for ignoring the Palestinians and establishing by force Jewish sovereignty over a land that has a native, non-Jewish majority. You can claim that the majority population simply doesn’t exist (Zangwill, footnote 2), or that they not a people (Golda Meir ), or they’re not native (Joan Peters, also here), or that their rights matter less (Balfour ), or that their demands are so outlandish - i.e. they don't correspond to yours - that you are left with "no-one to talk to" (Barak, Sharon, and presumably Olmert)... etc. As long as a Jewish homeland in Palestine equates with Jewish sovereignty over non-Jewish Palestinians, those Palestinians will not aquiesce in your plans for them, and you will have to invent claims like these to justify forcibly imposing your rule over them. This is why so often pro-Zionist discourse revolves not around assertions about Zionism but these denials about Palestine.
Unfortunately, your need to believe one or other of these claims in order to justify your national mythology is not enough to make any of these claims actually true. Eventually, your political fantasy will collide with your demographic reality, as it apparently did when Gershon Ben Ya'akov woke up in the night and realized that the people whose literal or national nonexistence has been a consistent refrain in Zionism, are not only still there but - numerically at least - thriving.
And this, I think, is Hanegbi's "something gigantic" that prevents Israel from recognising and making peace with the Palestinians. If your national self understanding is built on denial of the Palestinian reality, it can be profoundly unsettling when that reality is staring you in the face every day. Can your national mythology still stand if you dispense with the lies that you have used to prop it up? Gush Shalom tackled this issue from a liberal Zionist perspective in its booklet, Truth Against Truth (PDF file), which was based on the premise that it is possible to tell the truth about ourselves without telling lies about each other. But most Israelis are not Gush Shalom. Most are apparently more comfortable with the view expressed by Menachem Begin, who explained to the residents of Kibbutz Ein Hahoresh that Zionism is essentially a zero sum game that absolutely requires the denial of Palestine and the Palestinians:
My friend, take care. When you recognize the concept of "Palestine", you demolish your right to live in Ein Hahoresh. If this is Palestine and not the land of Israel, then you are conquerors and not tillers of the land. You are invaders. If this is Palestine, then it belongs to a people who lived here before you came. 
In this worldview, it doesn't necessarily matter whether what you believe about the Palestinians is true or not: it matters only that you believe it, because that's what your ideology demands. That tortured logic is the path to Hanegbi's "protacted madness", and Gershon Ben Ya'akov's sleepless nights.
Jerusalem's former deputy mayor, Meron Benvenisti, came to a similar conclusion as Hanegbi about the impossibility of reconciling Jewish sovereignty in Palestine with the reality of the indigenous Palestinian majority, when he watched news footage of Israel’s Operation Rainbow in Rafah. Benvenisti realised that the newly-homeless Palestinian children he saw dragging their possessions behind them in suitcases as big as themselves as they fled the advancing IDF in 2004 were the grandchildren of the Palestinians he had once watched dragging their possessions behind them as they fled Israel’s expansion in 1948. He understood from this that a “Jewish homeland” based on Jewish sovereignty over Palestine was condemned to a Groundhog Day existence of endless war and periodic expulsion, because it was based on an original sin of ignoring the reality of the existing population:
Generation after generation, we cause them to abandon their homes, settling in them, and afterward, when the opportunity arises, take over their sanctuaries as well, and drive them away from there. Generation after generation, we feed the refugee consciousness, reconstruct the pain of displacement and expose another generation to the powerless rage of the displaced person. Afterward we face, frightened and threatened, the “return” – the life’s hope of every refuges and a stain on the settler’s conscience.
Something basic has gone awry here. If commanders, the sons of the fighters of 1948, send the grandchildren of the fighters for independence to “widen the route” – which means the expulsion of the grandchildren of the refugees of 1948 – on the pretext of existential threat, then there was something defective in the vision of the founding fathers. If after a half-century their enterprise still faces existential threat, this can only mean that they condemned it to eternal enmity, and there is no community that can for years on end survive a violent war for its existence.
-- An Old Refrain Stabs at the Heart By Meron Benvenisti, 20 May 2004
Benvenisti came to the conclusion that there cannot be a Jewish state, or any sectarian state in historic Palestine, but that Palestinians and Israelis have to find a formula under which they can live as equal citizens in a single country. I can understand the growing appeal of the one-state solution: I suspect that no Israeli government will accept a genuine two state solution until all the alternatives for maintaining control over the Palestinians have been tried and failed - by which time, settlement "facts on the ground" will have compromised terribly the possibility of a Palestinian state. And I strongly suspect that Fatah – the major voice of the two state solution on the Palestinian side - is much closer than its public pronouncements suggest to saying that as the Israelis cannot get out of the Occupied Territories let them stay, and instead of our own state we will have one-person-one-vote. But I still don't think that the undeniable difficulties of reaching a two state solution mean that we will default to a binational state. I think you could argue that the way the Middle East is spiralling right now makes genocide a more likely outcome to the I/P conflict than binationalism, should the two state solution fail. On a more positive note, it also seems to me that for all we hear about this being a holy war, and therefore inherently intractable, it really isn't. The dominant issue in the I/P conflict is not religion but nationalism, and the demands of nationalism can be satisfied at least for the foreseeable future by the establishment of two nation states. As for the settlements that currently make two states impossible, well they were not created by an act of God or a force of nature: they were established by political will, in order to frustrate Palestinian nationhood, and they will be evacuated when Israelis understand that successful Palestinian nationhood is the only way to safeguard Israeli nationhood, and develop the political will to undo the obstacles they have put in its way.
It does make me wonder, though, what possible future there is for a "Jewish state" when I read something like The Lieberman Paradigm, and realise that this is directed not at the Palestinians of the Occupied Territories but at the Arab minority within Israel, who are supposedly fully citizens of that state. Palestinian citizens make up only 20 per cent of the population in Israel, as the vast majority of the Arabs living in Israel's partition borders were expelled or fled in 1948 and are still refused the right to go home. (This is why "the only democracy in the Middle East" rings a little hollow to Palestinian ears: any sectarian regime can call itself a democracy if it is allowed to expel and exclude large numbers of voters who don't support the sect in power, but that's not exactly democracy as most of us understand the term). And now apparently even this 20 per cent is too many. For Gershon Ben Ya'akov, they are locusts; for Benjamin Netanyahu, they are a "demographic threat"; for Yitzhak Ravid they are a production line popping out a flood of primitive darky babies, and crying out for racially targetted birth control. And if Israel's Arabs refuse to accept that their failure to produce Jewish babies means they shouldn't reproduce at all, what are you going to do then, Dr Ravid? Sterilize them? Kill them? Haven't we all been down that road before?
If Jewish Israelis do not want to live alongside Palestinian Arabs, well, that's just tough luck: the time to think of that was before they decided to establish a Jewish state in Arab Palestine. Because the Palestinians are not going to go away, any more than Jewish Israelis are. Whatever the final borders of Israel, Israel is always going to contain both Jews and Arabs, and is going to have to find a way to be a state of all its citizens. That might not be how the Zionist pioneers expected their project for a Jewish homeland to end up, but I'm pretty sure they didn't intend the current alternative either: five million Jewish Israelis barricading themselves behind a wall, and lying awake at night panicking that the Arabs within might be having sex.
 The title - One Not Unimportant Fact - is taken from a letter written from prison on 29 May 1933 by future Indian Prime Minister Jawaharlal Nehru, in which he says of the project to make a Jewish homeland in Palestine: [T]here was one little drawback; one not unimportant fact seems to have been overlooked. Palestine was not a wilderness. Or an empty uninhabited place. It was already somebody else's home.
 Israel Zangwill: a land without a people for a people without a land.
 There is no such thing as a Palestinian people... It is not as if we came and threw them out and took their country. They didn't exist. - Golda Meir: Statement to The Sunday Times, 15 June 1969.
 The contradiction between the letter of the Covenant [the Anglo French Declaration of 1918 promising the Arabs of the former Ottoman colonies that as a reward for supporting the Allies they could have their independence] is even more flagrant in the case of the independent nation of Palestine than in that of the independent nation of Syria. For in Palestine we do not propose even to go through the form of consulting the wishes of the present inhabitants of the country, thought the American Commission has been going through the forms of asking what they are. The four powers are committed to Zionism and Zionism, be it right or wrong, good or bad, is rooted in age-long tradition, in present needs, in future hopes, of far profounder import than the desire and prejudices of the 700,000 Arabs who now inhabit that ancient land. - Arthur James, First Earl of Balfour, Aug 1919, cited by Edward Said, "The Question of Palestine." (Vintage Books Edition, April 1992; p.16)
 Reported in Israel's leading daily newspaper, Yediot Aharonot, on 17 Oct 1969.