Israel marks its 60th birthday in a climate of increasing racism, intolerance, corruption and militarism. A nation that has long seen itself as one of the most misunderstood is now almost unable to understand the world beyond its borders. Fear and anxiety provide the mood music of the celebrations.

The past decade has brought a sharp increase in anti-Arab sentiment, which finds many forms of expression, from sordid chants at sporting events ("Death to the Arabs") to blatant racism and attacks on Arab colleagues by right-wing pol iticians in the Knesset. In such an atmosphere, it is almost impossible for Arab citizens (or 1948 Palestinians) to identify with the state of Israel, despite the terms of their legal status. Indeed, it is increasingly difficult for them even to protect their civil rights and express themselves freely in public.

Anyone who doubts the depth of anti-Arab feeling has only to scan the internet. On 8 May, I was commissioned by the popular news site Walla! (associated with the newspaper Haaretz) to write a short column about the Israeli national anthem, "Hatikva" (or Hope). Haaretz had asked another writer to support the anthem. I was commissioned to write against it and to suggest a more suitable one.

My main point of opposition was that the opening words - "As long as deep in the heart/A Jewish soul yearns . . . towards Zion" - excluded the more than one million Arab citizens of Israel. Walla! debates are allocated some two hours' airtime and previous ones, for example on economic issues or the evacuation of the Jewish settlements in Gaza, have generated talkback that was overwhelmingly right-wing. However, the anthem debate exceeded even my pessimistic ex pectations.

Within an hour 481 comments had appeared, 472 of which were vehemently anti-Arab and abusive of "bleeding-heart leftists". Some of the comments were simply racist, but the majority were nationalistic, betraying deep hatred of Israel's Arab citizens.

Such expressions are now commonplace. If an Arab member of the Knesset (MK) expresses solidarity with Palestinians in the besieged Gaza area, the comment will be scrutinised minutely by Jewish politicians and journalists. Accusations of high treason are commonplace. Proposed parliamentary bills single out Arab MKs for clearly discriminatory treatment. One right-wing former minister, Avigdor Liberman, regularly threatens his fellow MK Ahmad Tibi in tones that are becoming increasingly brutal. Liberman himself faces serious accusations of corruption and bribery and, as his indictment becomes virtually inevitable, he has resorted to lurid and vociferous language said to go down well in his largely Russian-speaking constituency.

Amid intensifying hostility and even derision, the Jewish left and a handful of liberals from the political centre try to voice their protest. Centrist Zionists dissociate themselves from anti-Arab sentiment and claim there is no contradiction between Israel's claim to be a liberal democracy and the view that the Zionist nature of Israel is paramount and transcends norms of equality and democracy. Others claim anti-Arab feeling stems from misguided nationalism rather than racism. A reputable economist in Tel Aviv compared "the fervent patriotism in Israel, accompanied by lurid hostility against Arabs" with anti-German sentiment in Britain before the Great War.

"It is not 'racist' in the sense of generalising the entire Arab population or regarding them as inferior to us," he told me. "If the Israelis and the Palestinians were to reach a peace agreement, the hatred would evaporate." Depressing as it may seem, that was one of the most optimistic statements I heard during the anniversary celebrations.

To celebrate Independence Day this year, Israeli television screened a documentary about the 1948 war veterans. The normally alienated and cosmopolitan television producers and directors had flooded our screens with sickening, even embarrassing, bits of nostalgia. This documentary, however, was a gem. The veterans in the film, some approaching their nineties and therefore somewhat frail, were taken to the southernmost Israeli city of Eilat, on the shores of the Red Sea.

All had taken part in the bloodless capture of Eilat and had become famous 60 years earlier for raising, in the beautiful bay, a handmade Israeli flag painted in ink, thus securing Israel's access to the Red Sea.

At one important moment in the film, they were requested to state their views on Israel today. Had it met the expectations they had had back in 1948? Were they pleased with the way Israel had evolved? All expressed bitter disappointment, pointing to rampant corruption, the accusations of bribery laid against Prime Minister Ehud Olmert, and the nation's collective failure to secure a peace agreement with its Arab neighbours, including the Palestinians.

The most articulate of the veterans was Major General Avraham Adan, chief commander during the occupation of Eilat and the only senior officer, apart from Ariel Sharon, to emerge from the disastrous 1973 Yom Kippur War with flying colours. Adan masterminded the crossing of the Suez Canal in that traumatic war and has felt ever since that Sharon stole the glory which rightly belonged to him. Clear and lucid at 89, Adan was blatant in his criticism.

"Israel has changed for the worse," said the general. "Corruption gnaws at our fabric and threatens our very existence. We dreamed about a different, more egalitarian and more moral society."

Undoubtedly, Adan was expressing the feelings of most Israelis. Successive polls in Yedioth Ahronoth, Israel's most popular daily newspaper, show that the vast majority of Israelis do not trust the Establishment and are deeply wary of Olmert. Accusations of bribery are rife and it is almost certain that the prime minister will be indicted.

Uneasy conformists

Israel's Jews are conformist in their attitudes to institutions such as the anthem or the army, but they have become more aware of the impotence of their government and, at times, of its malevolence. The failure of the Israel Defence Forces in the Second Lebanon War of 2006 undermined the confidence of ordinary Israelis: the beneficiary of the crisis has been the right-wing Likud Party.

On 2 May, Haaretz carried an interview with Yaakov Weinroth, a respected barrister and self-professed Marxist. The paper's intelligent readership was treated to a breathtaking tour de force from this anti-corruption orator (who is, nevertheless, the legal adviser of most of Israel's corrupt politicians and of the settlers). Weinroth spoke at length in favour of social justice, yet expressed his support for the neoliberal Likud leader, Binyamin Netanyahu. Such contradictions confuse public opinion, and enhance Netanyahu's status not only in intellectual circles, but even among the direct victims of his social policies. False consciousness is not unique to Israel, but the geopolitical isolation of the country exacerbates the situation.

Perhaps the most telling sign of the nation's fear and distrust of the world outside came in the recent reaction to criticism levelled at the Chelsea Football Club coach Avram Grant in England. Grant has become an unlikely cult hero in his native Israel. Aviad Pohoryles, a sports commentator for Maariv, a popular Hebrew-language newspaper, found in Chelsea's unexpected win over Liverpool an opportunity to berate the British for their supposed anti-Israel attitude. England, he claimed, had always conducted a blatantly anti-Israel foreign policy: "Some of Grant's lack of legitimacy derives from this negative attitude towards Israel. Grant's presence at Stamford Bridge constitutes a certain answer to these heartless people."

Pohoryles is a reputed writer from the very mainstream, neither a settler nor a vehement right-winger. His deep suspicion of the British media, and his castigation of a journalist who happened to be critical of Grant's coaching style, hinting that the journalist's criticism was founded in anti-Semitism, are typical of an antipathy towards the British. There is a widely held belief that when the west criticises Israel, or when human rights organisations worldwide protest against the occupation, they are revealing deeply held, "traditional, Christian anti-Semitism".

Many Israelis, even liberals and left-wingers, hold Europeans morally responsible for the Holocaust either by participating in, or being indifferent to, the annihilation of the Jews during the Second World War. It would be a mistake to underestimate the profound influence such attitudes continue to wield on Israeli politics.