Israel's military actions during the Lebanon War and intifada, along with discriminatory policies toward Palestinians, reveal a profound ethical crisis through the Jewish theological lens of *kiddush Hashem* (sanctification of God's name) and *hillul Hashem* (desecration of God's name). Drawing on firsthand rabbinical experience during the intifada period, this theological and ethical analysis explores how Israel's conduct as a Jewish state shapes both Jewish identity and moral standing globally. The investigation examines Israeli policies and military decisions against traditional Jewish values, particularly regarding treatment of non-Jewish populations. Key findings reveal a fundamental tension between Israel's Jewish state identity and its democratic obligations to all citizens, including Palestinian Arabs. Two competing Jewish approaches to non-Jews emerge: exclusivist-chauvinist versus universalist-egalitarian traditions. The analysis demonstrates that Israel's true Zionist calling extends beyond establishing a nation-state to creating moral reconciliation between peoples and embodying universal Jewish values of justice and righteousness. Recognition of mutual Palestinian-Israeli suffering and implementation of policies reflecting Judaism's highest ethical standards, rather than narrow ethnic interests, offer a path forward aligned with authentic Jewish values.