Israel celebrated its 60th birthday yesterday with both exuberance and foreboding. This was more than an excuse for a national party. Six decades after the Jewish state became a phoenix that rose from the ashes of the Holocaust, Israel has much to celebrate. It is a thriving modern pluralist democracy of some seven million people. It has a free press and an independent judiciary. It has chalked up outstanding achievements, especially in science and technology and agriculture. Coverage of the anniversary has reminded us of the hardships endured by early settlers struggling to reach their promised land, their joy on arrival and the utopianism of life on the kibbutz.

In the West Bank and Gaza, the anniversary had a markedly different tone. Events were staged there to remind the world that national liberation for the Jewish people represented displacement and oppression for the Palestinians: Israel's creation was their "nakba" (catastrophe). Today 4.5 million Palestinian refugees, the descendants of those who stayed on, are second-class citizens. In the occupied West Bank, they suffer a form of apartheid as illegal Israeli settlements mushroom around them, while Gaza amounts to an open prison. Four decades of occupation have brutalised both sides and fuelled Arab and Muslim anger throughout the world.

Both sides bear responsibility for the lack of peace and stability. Both have claimed the lives of civilians, though there is a striking asymmetry in the numbers, with the Israeli army's bombs and missiles causing considerably more casualties. The knee-jerk rejection of any criticism of Israeli policy as anti-Semitic does not help their cause. It makes real anti-Semitism harder to counter. Demonising as "racists" those such as former US President Jimmy Carter, who highlight cruel treatment of the Palestinians, damages debate.

Between the first and second intifadas, there was hope of peace and a two-state solution based on the pre-1967 borders. Now, despite American talk of a peace deal before December, few believe them. The current instability serves no-one's interests, least of all the Israelis when an aggressive Iran reasserts its regional dominance.

Part of Israel's problem is a form of proportional representation that continually hands the balance of power to small extremist parties with an undue influence over policy. So the government talks about peace, yet rejects a public proposal from Hamas for a ceasefire in Gaza. Polls indicate that a majority of Israelis and Palestinians favour a two-state solution, and most Israelis want their government to speak to Hamas. A polarised debate helps nobody. It is up to the west and Israel's Arab neighbours to recognise that both sides are internally divided and neither holds a monopoly of the moral high ground, then offer support and incentives to the forces of peace and reconciliation on both sides.