When you hit your 60th birthday, most of you will guzzle down your hormone replacement therapy with a glass of champagne and wonder if you have become everything you dreamed of in your youth. In a few weeks, the state of Israel is going to have that hangover.

She will look in the mirror and think – I have a sore back, rickety knees and a gun at my waist, but I'm still standing. Yet somewhere, she will know she is suppressing an old secret she has to face. I would love to be able to crash the birthday party with words of reassurance. Israel has given us great novelists like Amos Oz and A.B. Yehoshua, great film-makers like Joseph Cedar, great scientific research into Alzheimer's, and great dissident journalists like Amira Hass, Tom Segev and Gideon Levy to expose her own crimes.

She has provided the one lonely spot in the Middle East where gay people are not hounded and hanged, and where women can approach equality.

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But I can't do it. Whenever I try to mouth these words, a remembered smell fills my nostrils. It is the smell of shit. Across the occupied West Bank, raw untreated sewage is pumped every day out of the Jewish settlements, along large metal pipes, straight onto Palestinian land. From there, it can enter the groundwater and the reservoirs, and become a poison.

Standing near one of these long, stinking brown-and-yellow rivers of waste recently, the local chief medical officer, Dr Bassam Said Nadi, explained to me: "Recently there were very heavy rains, and the shit started to flow into the reservoir that provides water for this whole area. I knew that if we didn't act, people would die. We had to alert everyone not to drink the water for over a week, and distribute bottles. We were lucky it was spotted. Next time..." He shook his head in fear. This is no freak: a 2004 report by Friends of the Earth found that only six per cent of Israeli settlements adequately treat their sewage.

Meanwhile, in order to punish the population of Gaza for voting "the wrong way", the Israeli army are not allowing past the checkpoints any replacements for the pipes and cement needed to keep the sewage system working. The result? Vast stagnant pools of waste are being held within fragile dykes across the strip, and rotting. Last March, one of them burst, drowning a nine-month-old baby and his elderly grandmother in a tsunami of human waste. The Centre on Housing Rights warns that one heavy rainfall could send 1.5m cubic metres of faeces flowing all over Gaza, causing "a humanitarian and environmental disaster of epic proportions".

So how did it come to this? How did a Jewish state founded 60 years ago with a promise to be "a light unto the nations" end up flinging its filth at a cowering Palestinian population?

The beginnings of an answer lie in the secret Israel has known, and suppressed, all these years. Even now, can we describe what happened 60 years ago honestly and unhysterically? The Jews who arrived in Palestine throughout the twentieth century did not come because they were cruel people who wanted to snuffle out Arabs to persecute. No: they came because they were running for their lives from a genocidal European anti-Semitism that was soon to slaughter six million of their sisters and their sons.

They convinced themselves that Palestine was "a land without people for a people without land". I desperately wish this dream had been true. You can see traces of what might have been in Tel Aviv, a city that really was built on empty sand dunes. But most of Palestine was not empty. It was already inhabited by people who loved the land, and saw it as theirs. They were completely innocent of the long, hellish crimes against the Jews.

When it became clear these Palestinians would not welcome becoming a minority in somebody else's country, darker plans were drawn up. Israel's first Prime Minister, David Ben-Gurion, wrote in 1937: "The Arabs will have to go, but one needs an opportune moment for making it happen, such as a war."

So, for when the moment arrived, he helped draw up Plan Dalit. It was – as Israeli historian Ilan Pappe puts it – "a detailed description of the methods to be used to forcibly evict the people: large-scale intimidation; and laying siege to and bombarding population centres". In 1948, before the Arab armies invaded, this began to be implemented: some 800,000 people were ethnically cleansed, and Israel was built on the ruins. The people who ask angrily why the Palestinians keep longing for their old land should imagine an English version of this story. How would we react if the 30m stateless, persecuted Kurds in the world sent armies and settlers into this country to seize everything in England below Leeds, and swiftly established a free Kurdistan from which we were expelled? Wouldn't we long forever for our children to return to Cornwall and Devon and London? Would it take us only 40 years to compromise and offer to settle for just 22 per cent of what we had?

If we are not going to be endlessly banging our heads against history, the Middle East needs to excavate 1948, and seek a solution. Any peace deal – even one where Israel dismantled the wall and agreed to return to the 1967 borders – tends to crumple on this issue. The Israelis say: if we let all three million come back, we will be outnumbered by Palestinians even within the 1967 borders, so Israel would be voted out of existence. But the Palestinians reply: if we don't have an acknowledgement of the Naqba (catastrophe), and our right under international law to the land our grandfathers fled, how can we move on?

It seemed like an intractable problem – until, two years ago, the Palestinian Center for Policy and Survey Research conducted the first study of the Palestinian Diaspora's desires. They found that only 10 per cent – around 300,000 people – want to return to Israel proper. Israel can accept that many (and compensate the rest) without even enduring much pain. But there has always been a strain of Israeli society that preferred violently setting its own borders, on its own terms, to talk and compromise. This weekend, the elected Hamas government offered a six-month truce that could have led to talks. The Israeli government responded within hours by blowing up a senior Hamas leader and killing a 14-year-old girl.

Perhaps Hamas' proposals are a con; perhaps all the Arab states are lying too when they offer Israel full recognition in exchange for a roll-back to the 1967 borders; but isn't it a good idea to find out? Israel, as she gazes at her grey hairs and discreetly ignores the smell of her own stale shit pumped across Palestine, needs to ask what kind of country she wants to be in the next 60 years.

j.hari@independent.co.uk