One day after a British woman was killed in a bus bombing in Jerusalem, the security situation continued to deteriorate in Gaza, as Palestinian militants fired rockets into Israel overnight Thursday and Israel retaliated with tank fire and airstrikes. Israel was hit by five mortar shells and two Qasam rockets overnight with no serious injuries. Israel then launched four airstrikes against smuggling tunnels into Egypt. Israel also aimed tank fire over the border at a Hamas facility.

The Daily Beast's Dan Ephron reports on why Israel faces a lose-lose battle in its response.

Israel’s impulse following today’s bombing in Jerusalem and a string of rocket and mortar attacks in recent days will be to bombard the Hamas-controlled Gaza Strip, possibly reprising its 2008-2009 assault that killed more than a thousand Palestinians. But the diplomatic reality for the Jewish state, more isolated than in decades and vulnerable to the region’s seismic shifts, is a sober one: Israel probably can’t afford another Gaza war.

The bombing at a crowded bus stop marked one of the worst attacks in Jerusalem in three years and, together with the murder of five family members at a settlement last week, has jolted Israelis from a period of relative security and stability. At least 30 people were injured from the bomb, wired into a briefcase and left near a concession stand (eerily named “A Blast of a Place.”)

Israeli radio and television cut into their regular programming to broadcast live from the scene, in footage reminiscent of the Palestinian uprising a decade ago: police cordoning off a square block, medics bandaging the wounded on the sidewalk, forensic experts picking through the glass and twisted metal.

No group immediately claimed responsibility for the attack but government officials pointed a finger at Hamas, which has traded fire with Israel several times in recent days across the Gaza border. In the bloodiest incident of the past week, Israel shelled the town of Shejaiya immediately after a Palestinian rocket attack, hitting a house and killing four civilians, including two children. The Israeli army said it had been targeting perpetrators of the rocket attack and a malfunction might have caused the mishap.

Deterring Hamas anew would require “massive air strikes for some days.”

The last time Israel suffered such an intense bout of rocket fire was in 2008. It responded in December of that year with a broad 22-day assault dubbed Operation Cast Lead. Now, more than two years later, security experts and former officials talk about an erosion of Israel’s military deterrence against Hamas, a near-sacred concept here. Giora Eiland, a former national security adviser, told The Daily Beast: “The Israeli government will not be able to keep its restraint up for too long. If this continues, it will definitely lead to a military initiative.” He said deterring Hamas anew would require “massive air strikes for some days.” Perhaps sensing Israel’s impulse to respond sharply, the White House said in a statement after the Jerusalem bombing: “We stress the importance of calm and urge all parties to do everything in their power to prevent further violence and civilian casualties.”

The diplomatic fallout from Cast Lead is still fresh in the minds of most Israelis. The operation prompted broad international condemnation and drew a scathing United Nations report. Written by the prominent South African jurist Richard Goldstone, the 600-page document accused Israel of deliberately targeting the civilian infrastructure of Gaza in order to make life unbearable for Palestinians. It also held Israel responsible for the death of hundreds of civilians. Though Israel is accustomed to harsh treatment by the UN, the criticism lasted many months. As a result of the report, some high-ranking Israeli officers and officials could still face international-jurisdiction indictments.

Israel weathered the criticism largely because its standing in the world was relatively high. Its prime minister at the time, Ehud Olmert, had been engaged in serious peace talks with both Syria and the Palestinians. Leaders in Europe and even parts of the Arab world viewed his willingness to compromise as genuine and far-reaching. In Washington, Israel had an unwavering and uncritical ally in the form of George W. Bush.

Netanyahu’s situation couldn’t be more different. He has alienated traditional allies like Germany and France, who believe the Israeli leader is squandering an opportunity to make peace with the Palestinians. He has also disappointed President Obama, who pressed him last year to extend a freeze on settlement construction in the West bank to no avail. Closer to home, Israel lost its important relationship with Turkey a year ago when Netanyahu sent commandoes to intercept a flotilla bound for Gaza. Last month, Egyptian protesters deposed Israel’s best friend in the Arab world, Hosni Mubarak.

The result is a constraint on Netanyahu’s room to maneuver. Though he will likely retaliate for the Hamas attacks by bombing Gaza and pressing Palestinian leaders in the West Bank to crack down on militants, a broader operation would threaten to push Israel deeper into its isolation. “The international community is going to urge restraint,” says Robert Danin, a fellow on Middle East policy at the Council on Foreign Relations. “That’s why there are only so many ways this can play out.”

With Joanna Chen and Daniel Stone

Dan Ephron has been Newsweek’s Jerusalem bureau chief since January, 2010. Previously, he served as a national security correspondent and deputy bureau chief for the magazine in Washington. His stories have also appeared in the Boston Globe, The New Republic and Esquire .