Earlier this week, a hacker or group of hackers who claim to be Saudi scaled up their cyber offensive against Israel by paralysing the websites of El Al airline and the Tel Aviv stock exchange. This was the latest in a series of attacks over the past fortnight, which has also seen the credit card details of thousands of Israeli citizens leaked online.

The online guerrilla campaign has left many Israelis feeling vulnerable in a domain where they believed they had absolute regional supremacy: technology and IT. Although the nationality of the hackers is not certain, to restore their national honour and create what they called "deterrence", Israeli hackers were quick to retaliate against the stock exchanges in Saudi Arabia and Abu Dhabi.

"There was always a feeling that Israel is a technological 'superpower' and a hi-tech nation," Bar Shem-Ur, a young reporter on a popular current affairs programme broadcast by Israel's liberal Channel 10, told me. "I think that the recent attacks … broke some of the myths that surrounded the feeling that Israel can deal with anything in the cyber world."

Of course, Israel is the Middle East's undisputed technological powerhouse, but anyone who lives here can tell you that the reality is far creakier and more makeshift than the image. Moreover, Arabs are hardly in the technological stone age and Palestinians, despite the restrictions of occupation, are gradually bolstering their innovative credentials.

Nevertheless, many Israelis apparently do regard their nearest neighbours as being backward. "Many Israelis believe that Palestinians are not educated, are just farmers and labourers, and have no idea about technology, despite the fact that many work in Israel's hi-tech sector," says Khulood, who is from Nazareth and works for an international agency.

As an Israeli citizen who grew up among Israelis, Khulood speaks fluent Hebrew, is an independent, liberated and highly educated woman who lives alone, yet she finds many of her Jewish compatriots are convinced that Palestinian women are oppressed and locked up at home.

"It's not because [Jewish] Israelis don't encounter Arabs. It's just more comfortable for them to look down on us – it makes their colonial enterprise easier," she contends. "If they acknowledge that we are similar, this will raise the uncomfortable question of why they don't treat us as equals."

That said, demonisation is a two-way street, and Khulood acknowledges that Palestinians in Israel have their own negative stereotypes of Israelis, namely that they are devious, cunning and untrustworthy. Although there are Israelis who see this as a manifestation of classic antisemitism, Khulood believes these unflattering stereotypes have more to do with the reality of the conflict.

"We have an image of Israelis as people who only know violence, infringe on the rights of others and take their land," says Wajdi Kharraz, a qualified IT specialist from Nablus who now works in the family business. "In our daily lives, we only see soldiers and in the media we only hear about Israeli violations. We don't see much of the other faces of Israel."

Kharraz got the chance to see other facets of Israel and Israelis when he and a group of ordinary Palestinians went on a trip to Israel organised by a peace-building NGO. "My view has changed. I have overcome the fear barrier," Kharraz says, reflecting on the experience. "I used to see Israelis only as soldiers. But after meeting this group, all of whom have served in the IDF, I see they too are ordinary people like me. Now, when I go through a checkpoint, I see a person behind the gun; that this soldier is also human."

Likewise, a group of ordinary Israelis visited Palestinian towns in the West Bank, which Israeli law prohibits them from entering without a special permit. "Most of the Palestinians didn't know much about Judaism and their knowledge of Israel was mostly through the prism of the conflict," recalls Rachael, an Israeli university student from Jerusalem who is studying Islam. "Even though they were quite secular, they were pleasantly surprised to learn how similar Judaism and Islam are."

For her part, Rachael was encouraged by how eager the Palestinians were to learn about the Holocaust and the sympathy they expressed for Jewish suffering, despite all the talk in Israel of Arab Holocaust denial.

On a lighter note, she recalls that their group included a couple of fair-complexioned Palestinians, one of whom even had red hair. This apparently threw some of the Israelis who expected all Palestinians to look "Arab".

"After more than 60 years living together, we often look, dress and even act alike. In Israel, it can be very hard to tell an Arab from a Jew," Khulood said. "Despite the conflict, we have gained things from them and they have gained things from us."

And, with the failure of the formal peace process, it is perhaps this gradual, understated grassroots osmosis that offers some of the best hope for a future of greater equality and tolerance.