Israel suffers from antiquated thinking which informs their paranoia. First, they are concerned about what "gentiles" think. Second, the don't give a damn what "gentiles" think.
It's an unresolved conflict.

Israel is turning into a theocracy (if they aren't already).

The solution is clear. A Zionist State might be compared to a Christian State. In the long run, unsustainable. However, power sharing between Israeli citizens both Jewish and Arab (Palestinian) is the only workable answer. There is no reason for Israeli Jews to give up their religion while sharing political power with Israeli Palestinians.

Extremist Jewish, Muslim and Christian groups that attempt to force their religion on a political level are the problem.

This is why the Separation of Church and State is the best model.