Well, remember that it could be worse. Israel could be just as bad as them.

To it's credit, it managed not to sink down to the level of it's neighbors. This could have easily happened, especially since Israel has it's share of extremists, too. Also, while people certainly remember the Holocaust, they only seem to see it as a thing that happened to
them. One must remember that Nazis were human as well, and that if the Israelis are not careful this could happen again, only this time by their own hands. The Nazis did not invent tyranny, genocide or any of the atrocities they committed. Begin Germans, they perfected them from the technological side, but that's all. Anyone could do it, given enough bigotry and hatred.
The whole idea of Israel being a "Jewish state" sounds fishy to me. It should just be a state, one where Arabs, Jews, Christians and even Pastafaranists could live peacefully. I only accept religious discrimination against Scientology, and that's a special case.

Others can be "Muslim states" if they want, but they'll be the ones in the wrong then. If the place becomes primarily Arab through immigration, that's fine, as long the government keeps being modern and progressive. Sticking a "Jewish state", in the middle of a mostly Arab area is never going to get fully accepted. However, sticking a democratic, free state in which a lot of Jews happen to live could work.