Israel's image problem abroad is down to one issue: the stark and growing difference between how Israelis view their country, and how it is seen from outside. This explains the anger and insult that Israelis feel when they watch themselves on the BBC or CNN. It can't possibly be us, they protest, the networks must be biased and pro-Arab.

From the outside, Israel is defined by its everlasting conflict with its Arab neighbours, the Palestinians in particular. The vast majority of international news stories reflect this perception, depicting Israel as one-half of either war or peace talks. Occupation stories like Gaza under siege, new construction in West Bank settlements, or demolition of Palestinians' homes in East Jerusalem, are prime-time stuff.

Israel per se attracts little interest abroad, with its relatively small population of seven million. Think Denmark or Paraguay. Who bothers to cover its internal politics? Who would recognise its leaders' names and faces? Thanks to the Middle East conflict, Israeli leaders have always been internationally recognised figures, and our political system is closely watched.

Israelis define their country as a western democracy with an advanced high-tech economy, a bastion of innovation, modernity, and technological development in a backwards region. We see the conflict as a fact of life, like the weather to Englishmen. Most people are more excited about money, sex, real estate, and travel abroad. The media makes comparisons with America, Britain, or the OECD average, and not with our immediate neighbours Egypt, Jordan, Syria, or the Palestinian Authority.

It wasn't always like that. When I was a little kid, the conflict was all around. Children's books described brave, good-looking Israeli heroes defeating ugly, ridiculous Arab villains. On Lag Ba'omer, a holiday celebrated with bonfires, we used to burn effigies of Gamal Abdel Nasser, Egypt's then-leader and our arch-enemy. Yasser Arafat's figure followed. Today, few kids would bother to express similar public hatred towards Iran's president, Mahmoud Ahmedinejad, or the Hezbollah leader, Hasan Nasrallah.

The separation policy of the former prime minister, Ariel Sharon, who strove to isolate Israelis from the conflict through the Gaza pullout and the construction of the West Bank security barrier, paid off handsomely. The vast majority of Israelis, who live in and around Tel Aviv, don't interact with Palestinians, or even with Jewish settlers in the West Bank. Only a small number of conscripts and reservists, deployed across the barrier as part of their military service, would go there.

To most Israelis, New York, London and even Thailand are closer to home than Palestinians towns like Nablus or Ramallah and their adjacent settlements, a mere 40-minute drive from downtown Tel Aviv. Occupation stories are barely reported in the Israeli media, which prefers to praise Israeli scientific, business, and cultural achievements or to chew on the latest political scandal.

The "demographic problem" – namely, the Palestinian threat to demand "one man, one vote" and overwhelm Israel with an Arab majority between the Jordan River and the Mediterranean – is widely discussed in op-ed articles, but fails to scare Israelis. After all, how can you be defeated by invisible people?

On Tuesday, defence minister Ehud Barak gave a dire public warning: "As long as in this territory west of the Jordan River there is only one political entity called Israel it is going to be either non-Jewish, or non-democratic," he said. "If this bloc of millions of Palestinians cannot vote, that will be an apartheid state." Clear as they were, his words failed to stir public debate.

First-time foreign visitors are often struck. They have heard of "Israeli apartheid" and expect to see separate toilets and buses for Jews and Palestinians. Instead, when exposed to Tel Aviv's beaches and lively night spots, they are shocked. "I thought it would be far more religious and conservative" is a common visitor's perception. And they never see any Palestinians around, unless they bother to drive up the hills to find them.

The government's PR machine tries to build on this sentiment, leading an effort to "rebrand" Israel away from the image of an unpleasant fortress. Bikini-clad models and high-tech entrepreneurs demonstrate the new, post-conflict, western-lookalike Israeli society. The underlying message to North American and European audiences is "We are just like you". The Palestinians have no Bar Refaeli or Shai Agassi (the electric car innovator), both of whom spend most of their time outside Israel.

A similar process happened in India. While Indians are still preoccupied with Pakistan, and despite the ongoing fighting in Kashmir and in India's cities, they define their country outside the sub-continental conflict. India today is an economic powerhouse and aspiring global power, not only a belligerent in an endless postcolonial conflict. If they can do it, why couldn't we?

In Israel, the appearance of calm – especially in the past year, which has been the quietest security-wise in a decade – has important political ramifications. Operation Cast Lead in Gaza, with its ensuing allegations of Israeli war crimes, is seen here as a PR problem rather than as a moral or legal issue. The settlement debate is seen through the prism of Israeli-American relations, which most Israelis cherish.

As a result, most Israelis are indifferent to the establishment of a Palestinian state. For several years, a stable two-thirds majority of Israelis have supported the idea in opinion surveys – while a similar majority doubted its possibility. They simply don't care, since they fail to see how an independent Palestine would make any change in Israelis' lives. At best, it might reduce some of the international criticism of Israel; and even that is doubtful. Israelis believe that security will be achieved by force, rather than diplomacy.

This attitude explains why the American effort to resume Israeli-Palestinian talks, despite ostensible majority support, fails to interest Israelis. It also explains why from the outside, Israel appears to be divorced from the reality of its occupation, and apathetic to peace.