Draugnar,
Let me clarify a few things for you. Israel is a secular nation with secular laws and a secular judiciary. That being said, there is a large block of people who vote strictly on religious grounds (picture the abortion litmus test in the US). Many of the 'chosen' have moved to the West Bank, and that certainly complicates matters: however, Israel has shown in the past that it will remove their religious zealots from settlements, both in Sinai and in Gaza. Israel could do so again if there were a chance at peace. The settlements are not stopping peace. They are, however, stopping a Palestinian state. That is their intention. If there is peace, Israel could, if it wanted, remove the settlements. The hardline religious zealots are NOT a majority in the country.
"knowing that the free world would come to their defense"
Based on the history you described earlier in your post, why in the world would anyone in Israel believe that?!?!?!?
Left wing prime ministers have tried to negotiate peace, in earnest. Witness Rabin. But when you have 2 groups on your borders that refuse to recognize your country, so any peace settlement is essentially dead before it starts, how do you want them to 'back off their hard nosed stance'. I agree, the status quo does not work. But neither does 'backing off their hard nosed stance'.
(On a side note, the Red Star of David was rejected by the Red Cross. There is a Red Cross for Christian nations, a Red Crescent for Muslim nations, and a Red Crystal for 'miscellaneous and others'.)