When considering the situation in the Sinai Peninsula, Israelis are caught between a sand dune and the Red Sea. On one hand, they want to encourage the new Egyptian government to re-impose its control over the Sinai, which has become a center for smuggling everything from prostitutes to weapons. On the other hand, they fear that allowing Egypt to violate the historic 1979 Israeli-Egyptian peace treaty is “a slippery slope,” as one senior Israeli official put it.

The crisis was precipitated by an Egyptian decision to move tanks into the Sinai, violating the agreement which calls for the area to be basically demilitarized. Earlier this month, after presumed Islamist elements attacked an Egyptian border post killing 16 Egyptian soldiers, Egypt asked, and received, Israeli permission to bring attack helicopters into the area. Egypt has since arrested dozens of suspects.

But earlier this week, tensions were sparked when Egyptian tanks entered the area, apparently without coordination with Israel, in violation of the pact.

Publicly, Israeli officials have been circumspect.

“We are not going to dissect the Israeli-Egyptian peace agreement in the media, Ilana Stein, deputy spokeswoman for the Israeli Ministry of Foreign Affairs told The Media Line. “Regarding our relationship with Egypt, we have a mutual interest to fight terror.”

But not all government officials have been so reserved. Israeli media quoted Foreign Minister Avigdor Lieberman, not known for mincing words, as telling his foreign envoys, “Israel must not come to terms with Egypt’s violation of the peace treaty with us.”  Lieberman continued that “Israel understands (new Egyptian President Mohamed) Morsy’s need to display his authority in Sinai, especially following the bloody attack there recently, but we are very concerned that he deployed tanks without coordinating it.”

Egyptian media reacted sharply. Al-Ahram, a major Egyptian daily, quoted a military source that the operation was “well coordinated with both the Americans and the Israelis.” He added that there are daily meetings between Israeli and Egyptian security personnel.

“The fact that contact between both sides has not been made known to the press does not mean it’s not happening – actually it goes beyond mere information sharing and includes efforts to coordinate,” he said.

That was backed up by a senior Israeli defense official, Amos Gilad, head of the Political Diplomatic Bureau at the Ministry of Defense. He told Israel Radio that Israel was in "constant contact" with the Egyptians and that Israel's message was being heard.

"When the Egyptians introduce weapons that are not included in the agreement we check it and we talk to the Egyptians about it. We have direct communication with the Egyptians and we have made it clear that we demand a complete adherence to the terms of the peace agreement.

"It is important to safeguard the Military Appendix of the peace agreement; it is the cornerstone of the peace agreement and regional stability. We look at the total regional picture: we have a changing Middle East, Iran going nuclear, and it is an important time to maintain the peace agreement. We will not agree to a violation of the Military Appendix of the peace agreement. Israel is keeping things in proportion, and we are standing fast by our interests," Gilad said.

Israel conquered the huge area of Sinai (23,000 square miles) in 1967, and returned the territory to Egypt as part of the peace treaty. Under Egyptian President Hosni Mubarak, the area became a center for lawlessness.

“Sinai became a no-mans land as far as the central authority in Cairo was concerned,” Eli Shaked, a former Israeli ambassador to Egypt told The Media Line. “It became a springboard for criminals who, with the help of local Bedouin, made a fortune smuggling goods, women, prostitutes, drugs, weapons and ammunition to Gaza.” Israel became more concerned since the Hamas takeover of Gaza in 2007.

Until the last decade, Sinai continued to be a popular vacation spot for Israelis who went for the cheap hotels and unspoiled beaches. Currently, the Israeli government warns its citizens against travel to Sinai citing efforts by Islamists to kidnap Israelis in exchange for prisoners in Israeli jails. Earlier this year, Israel freed more than 1,000 Palestinian prisoners for an Israeli soldier, Gilad Shalit, who had been captured in a cross-border raid from Sinai. Despite the warnings, at least some Israelis continue to visit Sinai, and 10,000 Arab citizens of Israel went to Sinai for the Muslim holiday of Eid A-Fitr last week.

Israeli analysts say that neither Egypt nor Israel has an interest in provoking a crisis right now.

“The tanks are not a physical threat to Israel but it’s a question of principle,” Hirsh Goodman, a former military correspondent, told The Media Line. “There’s a peace agreement and it’s got clear stipulations, if those are to be changed it has to be done by mutual agreement.”

Logically, says former ambassador Eli Shaked, the tensions should pass and Egypt should withdraw its tanks. But logic doesn’t always work in the Middle East, he said with a laugh.

“There is a new government and a new leadership in Egypt -- people who might be very happy with forcing Israel to accept a new situation,” he said. “The Muslim Brotherhood has a clear very radical agenda and the Middle East plays by different rules.”