Analysis: Bad neighborhood risks getting worse for Israel

JERUSALEM (Reuters) - Israel is sitting uneasily in the eye of a storm as unrest and uncertainty spread around its Arab neighbors.

Political turmoil in Lebanon has strengthened Israel's Iranian-backed enemy Hezbollah, while a leak of hundreds of sensitive documents has dented the leadership of its frustrated peace partner, the Palestinian Authority in the West Bank.

Attention has now swung down to the south, where its longest-standing Arab ally, Egypt, has been jolted by nationwide anti-government protests.

While the upheaval in Lebanon has caused concern, the fear of serious strife in Egypt has set alarm bells ringing.

"The Israeli strategic community is praying that this unrest in Egypt will fade away and not escalate into a prolonged period of instability," said Gidi Grinstein, the founder and president of the respected Reut Institute think tank.

"Instability in Egypt dramatically transforms the strategic environment in Israel."

Israel has long sought normal relations with its neighbors, but Egypt was its only Arab associate until the peace process launched by the 1993 Oslo interim accords led to a treaty with Jordan and a handful of other Arab countries.

However Egypt, which shares a long, desert border with Israel, remains by far its most important Middle East partner -- a regular facilitator in interminable peace negotiations and until now a rock of stability in an otherwise turbulent area.

NO FUTURE GUARANTEES

Israeli officials say in private they cannot believe that President Hosni Mubarak will be overthrown by the demonstrations, inspired by a popular uprising in Tunisia.

But if he should fall, there is no guarantee that whoever might follow him will continue to tend to Israel ties.

Ordinary Egyptians have never warmed to Israel, despite more than three decades of peace, and regularly blame it for their woes. Recently some even suggested that Israel might have trained a killer shark to terrorize a top tourist resort.

The main opposition force in Egypt, the Muslim Brotherhood, has said it would put the 1978 Camp David peace accords to a referendum if it took power.

"If Mubarak is toppled then Israel will be totally isolated in the region," said Alon Liel, a former director-general of the Israeli Foreign Ministry and a former ambassador to Turkey.

"That would not represent a security threat, but it would be a political blow, coming on top of our growing international isolation, and also a psychological blow to the Israeli public."

The few Israeli ministers to have spoken publicly about the situation have refused to speculate about Mubarak's future and sought to shift attention back to Lebanon, where a dramatic power grab has put Iran-backed Hezbollah in the driving seat.

"I think what is happening in Lebanon is worse than what is happening in Egypt," Vice Prime Minister Silvan Shalom told Israeli Army Radio.

"Because, in Lebanon, a terrorist organization has taken over and will take control of security forces while getting its instructions from Iran, which calls for Israel to be wiped off the map."

STATE-ON-STATE

Israel has already fought one war with Hezbollah in 2006, in which more than 1,200 Lebanese died, the bulk of them civilians, and parts of south Lebanon and Beirut were devastated. One hundred and sixty Israelis, mostly soldiers, were also killed.

A ceasefire is in force. But Israel complains that the Shi'ite Muslim group has managed to secure thousands of missiles powerful enough to strike deep into Israeli territory. It fears this arsenal could be unleashed at Iran's command.

Paradoxically, Grinstein said the likely creation of a Hezbollah-backed government in Lebanon could strengthen Israel's position by turning its conflict with the Shi'ite group into a conventional state-on-state confrontation.

When there was a Western-backed government in Beirut, Israel felt obliged to focus retaliation on Hezbollah targets, he said. Such restraints would now dissolve.

"So the strength of Israeli deterrence has just increased," he said.

What hasn't increased is any hope that the startling changes being seen in the Middle East might provide a spur to the peace process, which ground to a halt last year over the issue of Jewish settlements in the West Bank.

The huge uncertainty in the region means now is not the time to push forward with broad peace initiatives, said Oded Eran, director of the Israeli Institute for National Security Studies.

"Clearly the winds of change are blowing," he said.

"If I were in the Israeli government, I would say that there are very strong signs of instability, so it is difficult for us in strategic terms to take long-term decisions that alter the situation dramatically between us and our neighbors."

(Editing by Kevin Liffey)