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Before Donald Rumsfeld departed from the Pentagon, the "Transformation Group" he headed worked with an Israeli army team to develop ideas for controlling the Palestinians after Israel withdraws from the occupied territories. Eyal Weizman, an Israeli academic who has written about this cooperation, tells us that they decided to do this through an invisible occupation: Israel would "seal the hard envelopes" around Palestinian towns and generate "effects" directed against the "human elements of resistance". We saw this concept being implemented in Beit Hanoun last week when the Israeli army killed 19 sleeping people with a missile attack.

The world can look forward to more of the same. According to Weizman, the chief of staff of the Israeli armed forces, Dan Halutz, confirms that the Israeli army sees the conflict as "unresolvable". It has "geared itself to operate within an environment saturated with conflict and within a future of permanent violence ... it sees itself acting just under the threshold of international sanctions ... keeping the conflict on a flame low enough for Israeli society to be able to live and prosper within it." So here's another function for the separation wall Israel is building: to shield Israeli society from too close a knowledge of the brutal acts their army carries out in their name.

And yet Israeli intellectuals wonder at the malaise that grips their country. Two Nobel prize laureates, Yisrael Aumann and Aaron Ciechanover, were recently quoted bemoaning the "fatal disease: the depletion of spirit ... [the] cancer that has spread through Israeli society". They attribute it to a kind of generalised "selfishness" which, oddly, they think may be OK in Switzerland but not in Israel. It's nothing to do with "the enemy" they say, because they can handle the enemy with their "wisdom and technology". Again, as we saw in Beit Hanoun.

Einstein, their distinguished predecessor, expressed grave doubts about political Zionism. A letter he signed, published in the New York Times in December 1948, warned against the emergence in Israel of (the future prime minister) Menachem Begin's "Freedom party". It cited Deir Yassin, where Begin and friends, eight months earlier, had killed 240 men, women and children and "were proud of this massacre". "This," the letter goes on, "is the unmistakable stamp of a fascist party for whom terrorism ... and misrepresentation are means, and a 'leader state' is the goal." Professors Aumann and Ciechanover might consider what Einstein would have made of the scenes in Beit Hanoun and Beit Lahiye over the last several weeks.

David Grossman seemed to many commentators to be evoking Hamlet in his Rabin memorial address on November 4, published in the Guardian. But when Grossman in effect argued that something was rotten in the state of Denmark he was merely referring to the lack of a "king" in Israel - a leader "to appeal to the Palestinians over the heads of Hamas" to start another peace process. But the peace processes the Palestinians have been subjected to have only led to their further dispossession. The Palestinians elected Hamas last January because two decades of interacting with a variety of Israeli governments has bankrupted the secular Palestinian leadership politically and morally. So the wish to engage in yet more talks, to get the "peace process" back on track, is either catastrophically blind or expresses ill faith. It always comes with lamentations over a "noble" project that has somehow gone wrong.

The secret rotting at the core of the state of Israel is its refusal to admit that the Zionist project in Palestine - to create a state based on the dispossession of the non-Jewish inhabitants of the land - was never noble: the land it coveted was the home of another people, and the fathers of the Israeli nation killed, terrorised and displaced them to turn the project into actuality. But the Palestinian nation lives on - visibly and noisily and everywhere. To make its own denial stick, Israel has to deny and suppress Palestinian history. To impose its design on Palestine, it has to somehow make the Palestinians disappear. "Things bad begun make strong themselves by ill"; and so the ethnicide continues. The new deputy prime minister, Avigdor Lieberman, plots against the Palestinians within Israel. The Israeli army kills and terrorises the Palestinians in the West Bank and Gaza. Zionists and their friends are desperate to silence the voices of and for Palestine. Meanwhile, Israel insists it is civilised, decent, peaceable - a light unto nations. How can a society caught in such delusion thrive? And how can people living within the Zionist project as privileged Jewish citizens bewail their embattled lot or be puzzled by it? Liberal Israelis of the left should heed another couple of lines from the bard: "Glamis hath murder'd sleep, and therefore Cawdor shall sleep no more; Macbeth shall sleep no more."

Israel will not be well until it acknowledges its past and makes amends for it. The process has a name: truth and reconciliation. Israelis cannot remain within the Zionist framework and profit from it and think of themselves as good citizens of the world. Many thoughtful and brave Israelis have made a choice. Some have left Israel, others remain. Practically all have made it their life's mission to expose how Zionism really works - and what it costs.

Since 1988, initiatives, peace talks and road maps have aimed to establish a Palestinian state in the West Bank and Gaza with its capital in Jerusalem, and to do justly by the Palestinian refugees. For 12 years none of this happened, and first-hand accounts of the Camp David talks in 2000 show that Israel did not have the political will then to make the necessary minimum offer. Presumably it still doesn't; hence the "sealed envelopes". But, perhaps because the stakes are now so high, people are once again speaking of the visionary solution: the secular democratic state, a homeland for both Israelis and Palestinians.

The Palestinian social scientist Ali Abunimah and the Israeli historian Ilan Pappé's recent books are the latest to make the case for this. They find hope, as Pappé puts it, in "those sections of Jewish society in Israel that have chosen to let themselves be shaped by human considerations rather than Zionist social engineering" and in "the majority of the Palestinians who have refused to let themselves be dehumanised by decades of brutal Israeli occupation and who, despite years of expulsion and oppression, still hope for reconciliation".

· Ahdaf Soueif's latest book is Mezzaterra: Fragments from the Common Ground

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