It has been a tense week in Egyptian-Israeli relations. It all started when unknown assailants crossed from Sinai to carry out a series of co-ordinated terrorist attacks in southern Israel, which left eight Israelis dead.

Terror was met with more terror and counter-terror, as Israel bombed embattled Gaza, leading to the deaths of at least 14 people, despite the absence of evidence that Gazans were behind the attack (some of the alleged perpetrators appear to be Egyptians), and Islamist militants in Gaza fired their Grad rockets into southern Israel.

In a reckless act that could have escalated the situation dangerously, Israeli troops – in a gunship that crossed the border, according to Egyptian security sources – also killed three Egyptian army and police personnel, apparently by accident.

Fortunately, Egypt refrained from taking a leaf out of Israel's book and did not give chase across the border to apprehend the killers. Instead, it sensibly decided to follow the diplomatic track and demand an apology and a joint investigation into the incident. A statement announcing the withdrawal of Egypt's ambassador to Israel was later retracted.

Though military tensions seem to have subsided, an escalating war of words is brewing between Egypt and Israel. In Israel, in addition to anger, grief and a desire for vengeance, allegations are flying that Egypt has "lost control" of Sinai. For its part, Egypt counters that the Israeli security apparatus was pretty much caught with its pants down in its failure to protect its borders. There is also a widespread foreboding that this is just a taste of things to come in post-revolution Egypt.

Egypt has also been gripped by anger, grief and calls for vengeance. Outraged protesters have spent days besieging the Israeli embassy – with one even climbing 21 storeys to replace the Israeli flag with an Egyptian one – to demand the expulsion of Israel's ambassador and the severing of ties.

So, what does the future hold for Egyptian-Israeli relations in light of this latest spat, the Egyptian revolution, the current hardline Israeli government and Palestinian plans to go to the UN next month to seek international recognition? Will the cold peace endure, escalate into a new cold war or warm into a big thaw?

At this juncture, it is very hard to tell which way the wind will blow. My reading of the situation – which I elaborated on at a recent conference – is that in spite of this recent flare-up the Egyptian-Israeli status quo will remain essentially unchanged, though relations between the two governments are likely to grow frostier.

A democratic Egypt more in tune with its public's mood is likely to collaborate less with Israel on security issues, such as the Mubarak's regime's unpopular involvement in the Gaza blockade, and might, I have argued, act as a deterrent against excessive Israeli militarism. In fact, some analysts and diplomats have concluded that the attack on Gaza was cut short out of fear of straining relations with Cairo further.

In my view, Israeli fears that a more radical regime, probably led by the Muslim Brotherhood, would "tear up" the Camp David peace accords are unfounded. Not only is the popularity of the Muslim Brotherhood a lot less than doomsayers have been warning – a recent poll showed its approval rating to be just 17% – now that the possibility of entering government has become realistic, the group has demonstrated its political pragmatism.

Despite the Muslim Brotherhood's official opposition to peace with Israel, a spokesman has said that the future of the peace treaty would be decided by "the Egyptian people and not the Brotherhood".

Moreover, the anger on the streets and the strong anti-Israeli stance taken by opposition politicians and ordinary Egyptians notwithstanding, there is little appetite in Egypt to return to the bad old days of confrontation. A number of recent polls, including this one, show that the vast majority of Egyptians are in favour of maintaining the peace treaty with Israel.

Even radical critics of Israel, such as the popular novelist Alaa al-Aswany, who famously refused to have one of his best-selling novels translated into Hebrew, has not called for the reneging of the accord.

Instead, he has demanded that Egypt renegotiate the articles relating to the presence of Egyptian troops in the Sinai. Perhaps al-Aswany will be disappointed to learn that senior figures in the Israel Defence Forces are, following last week's attack, in full agreement with this suggestion.

It may take two to tango but in the case of Egyptian-Israeli relations, the dance is a three-way one, with the Palestinians making up the hate triangle. Despite the generally pessimistic tone of the Israeli discourse on the Egyptian revolution, Israel is not a passive bystander and can do much to improve future ties with Egypt, namely by working towards or reaching a just resolution with the Palestinians, the thorn in the side of Egyptian-Israeli ties.

Next month's Palestinian bid to go to the UN should not be read as an act of hostility but as a desperate plea for freedom and justice, albeit a misguided one – something that an increasing number of Israelis are growing to realise. Sadly, such enlightenment is not shared by the ideologues currently leading the Israeli government, and the Palestinian leadership; both the PA and Hamas benefit in their own warped ways from the status quo.

With such inertia, what can be done to change the dynamics of the situation for the better? I believe that it is time to follow a new track in which ordinary people lead the process and not just sit back and wait for their ineffective leaders to do something or wait for the arrival some unknown saviour.

Palestinians and Israelis need to awaken to their own power and unlock their dormant potential to steer their own destiny towards peace and reconciliation, through mass, peaceful joint activism. Likewise, ordinary Egyptians need to cast aside their ideological opposition to dealing with Israelis and help facilitate and mediate such a "people's peace".