It's a long, long story but first a very quick overview...
Israel occupies land which for centuries was Palestinian land and the Palestinians and surrounding countries want it returned. They don't like Israel because it's on 'their' land and because Israel is Jewish and westernised. In the past Israel has occupied land from the surrounding countries that was not deemed part of Israel when it was created by UN resolution in 1948, this has heightened hostility towards Israel from it’s neighbours.
Israel has been targeted by suicide bombers and attacks from terrorist organisations such as Hamas and Hezbollah, against which it retaliates using it's powerful military to destroy terrorist strongholds. This it claims is done in self-defence but it's heavy handed approach and the killing of civilians is condemned by many countries as being disproportionate to the threats it faces.
Now for the more detailed explanation...
In about 1250BC the Israelites began to settle on the eastern Mediterranean in what was then Canaan (pronounced Kay-nan) and they established a Jewish homeland where they lived for about 750 years.
In 586BC the Babylonians drove the Israelites into exile and they wandered around homeless for about 70 years before returning to their homeland and rebuilding the cities and temples the Babylonians had destroyed.
The area was conquered by the Greeks in 333BC, the Jews regained control in 165BC, the Roman Empire took over in 63BC, the Jews revolted against the Romans in 70AD but the revolt was put down and the Jews were forced out. In the early 2nd century the Jews began returning once again and in 133AD there was a second revolt against the Romans that was also put down. The Romans destroyed the area and sold the Jews into slavery.
In 638AD the Muslim Arabs conquered the area. In 1099AD the Christian Crusaders conquered the Arabs. In 1187AD the Arabs conquered the Christians and the area remained under Arab control until 1918. In the latter years the area being controlled by the Turkish Ottoman Empire.
In 1896 plans were put forward for the establishment of a Jewish state and from 1897 onwards Jews began to move into the area. During the First World War the Ottomans were driven out by the British and the area came under British control (British Mandate Palestine).
The first clashes between Jews and Palestinians occurred in August 1929 and resulted in 243 deaths. This could be taken as the beginning of the current unrest as both sides clashed over the rights to the land that is now Israel.
Violence continued for 9 years until the Arab opposition to the establishment of a Zionist state was crushed by the British.
In 1947 the British handed control of the area to the United Nations. The situation was now critical, the holocaust of the Second World War had driven large numbers of Jews into the area to escape Nazi persecution and the Palestinians were more vehemently opposed than ever to the occupation of Palestine by Jewish settlers.
On 14th May 1948 the State of Israel was created by partitioning Palestine - a little over half became Israel and the remainder became Arab Palestine. The following day five Arab armies from Jordan, Iraq, Lebanon, Egypt and Syria invaded Israel but in the main were defeated. Egypt captured and retained the Gaza Strip and Jordan annexed the area now known as the West Bank.
Conflagrations continued between Israel and it's Arab neighbours but there was much in-fighting between the Arab states with each one wanting to lead the response against Israel. The outcome was the formation in 1964 of the Palestinian Liberation Organisation (PLO) whose objective, as the name suggests, was to liberate Palestine from Jewish occupation - in other words, to get rid of Israel and return the land to Palestine.
War broke out in 1967 when the Israelis launched a fierce offensive. The greatest threat against Israel being the powerful Egyptian Air Force, in a pre-emptive strike Israeli jets bombed the Egyptian planes whilst they were on the ground and destroyed them. In the six days of war that followed the Israelis forced the Egyptians back out of Gaza and wrested the Sinai from them, at the same time they gained the Golan Heights from Syria and regained the West Bank and East Jerusalem from Jordan. At the end of the war Israel had doubled the land it controlled and displaced about half a million Palestinians, many of whom fled to Lebanon, Syria, Egypt and Jordan.
Diplomatic efforts to see the land returned failed and in 1973 Egypt and Syria launched offensives against Israel in an attempt to retake the land they had lost. Initially they made advances but after three weeks were repelled by the Israelis who made further advances beyond those of 1967 pushing the Syrians back beyond the Golan Heights (some of which was later ceded back to the Syrians) and also to the west of the Suez in Egypt.
In 1977 Egypt, under the presidency of Anwar Sadat, made peace with Israel and became the first Arab state to recognise and accept the State of Israel. This led to the 1978 signing of the Camp David Peace Accord that set out a framework for peace in the Middle East. In return the Israelis pulled out of Sinai and the land was returned to the Egyptians.
The withdrawal from Sinai took until the summer of 1982 and just 2 months later the Israelis launched a massive military incursion into Lebanon in order to drive out the PLO who had been launching a series of attacks on Israel. The trigger for the incursion was the attempted assassination of Israeli Ambassador Shlomo Argov by the Palestinian group Abu Nidal (the same group that had been responsible for the massacre of Israeli athletes at the 1972 Munich Olympics).
The Israelis advanced as far as Beirut and under a ceasefire agreement the PLO fighters were allowed to leave Lebanon. This left the Palestinians defenceless and in what many consider to be one of the worst atrocities in the Middle East, the Phalangist militia (allied to Israel) killed hundreds of Palestinians in the Sabra and Shatila refugee camps. This massacre led to the resignation of the Israeli Defence Minister Ariel Sharon, who would later become prime-minister.
For the next few years there were constant tit-for-tat attacks between the Arabs and the Jews and in 1987 there was a huge uprising against the Israeli occupation of the Gaza and West Bank. The uprising, or Intifada, saw civil unrest on the streets, strikes, boycotting of Israeli goods and constant attacks on Israeli troops by stone-throwing Palestinians. This unrest continued for 6 years during which time more than 1000 Palestinians civilians were killed by the Israeli military.
During the Intifada the PLO, under the leadership of Yasser Arafat, had been trying to reach a peaceful settlement and had proposed that terrorism be renounced, that Israel return land it had captured in 1967 and that the State of Israel and Arab Palestine exist as had been decreed by the UN in 1947. The Israelis regarded the PLO as a terrorist organisation and chose not to negotiate with them.
There followed intense diplomatic attempts to resolve the situation, most notably the 1991 Madrid Summit and the 1993 Oslo Peace Process.
After the 1991 Gulf War the PLO has lost much of it's strength and was keener than ever to reach a peaceful compromise but was still regarded as a terrorist organisation by Israel, the consequence of which was that the Madrid Summit failed to achieve it's objectives.
In 1992 Yitzhak Rabin was elected as president of Israel and he was prepared to enter into talks with the PLO. This led to unprecedented progress being made in Oslo in which the Palestinians agreed to recognise the State of Israel and Israel agreed to begin withdrawing from occupied territory. The process stumbled along the way but progress was made.
The greatest threat to the derailment of the peace process came in 1996 when the Islamic militant group Hamas conducted a series of devastating suicide bombings in Israel. In retaliation Israel launched a sustained bombardment of Hamas strongholds within Lebanon.
Also in 1996 Binyamin Netanyahu was elected president of Israel, he had being strongly opposed to any peace deal with the Palestinians. In moves considered by many to be antagonistic he lifted a freeze on the building of new settlements in Israeli occupied territories and caused outrage when he permitted tunnelling directly below the al-Aqsa Mosque - one of the holiest of Islam's sites.
Increasing international pressure, mainly led by the US managed to keep the peace process just about on track and in January 1997 80% of Hebron was handed over by the Israelis.
Israel elected a new president - Ehud Barak. Barak turned his attention on reaching peace with Syria, this proved unsuccessful but he did fulfil a pledge to end Israel's 21 year involvement in Lebanon.
Meanwhile the Palestinian people were getting restless, after 5 years of peace negotiations and promises they had little to show for it and a second Intifada began on 28th September 2000. This quickly escalated and by the end of the year there were violent and bloody battles in the occupied Gaza and West Bank territories.
Support for Barak was dwindling and he resigned in December. In February 2001 Ariel Sharon was swept to power by an Israeli population that had become completely disillusioned with the 'land-for-peace' process of the 1990's and favoured Sharon's tougher stance on what he termed the 'Palestinian Problem'.
The bloodshed continued and escalated rapidly. The Palestinians intensified their suicide bomb attacks and the Israelis assassinated many Palestinian militants and increased military incursions into Palestinian self-rule areas. International efforts to calm the violence failed.
The violence continued to escalate in 2002 with more Palestinian militant attacks than ever including attacks timed to coincide with the Jewish religious festivals. In response Israel besieged Arafat in his Ramalah compound and re-occupied most of the West Bank.
Israel began the construction of what it described as a defensive barrier aimed at keeping the militants out of Israel but one that the Palestinians feared was an attempt to annex land and one that they described as a 'land grab wall'.
In April 2003 the US published the long overdue 'Roadmap', which detailed a step by step process to bring about peace in the Middle East, the key points of which were an end to Palestinian violence and an end to Israeli settlement of occupied land and military incursions.
The Israelis began to withdraw from Gaza and Bethlehem and Mahmoud Abbas, the Palestinian Prime-minister appointed by Yasser Arafat, secured a cease to Palestinian violence.
In August, after 2 months of peace, the calm was shattered by a series of devastating Palestinian suicide bombings. Israel retaliated with military raids and targeted killings.
Abbas resigned and was replaced by Ahmed Qurei. The wall continued to be built. The Israeli cabinet voted to remove Arafat and Sharon told the Palestinians he intended to pursue a policy of unilateral separation unless there was an end to the violence.
The suicide bombings and retaliations continued into 2004 and in April, Sharon revealed a disengagement plan that would see a complete withdrawal of Israelis (civilian and military) from the Gaza Strip.
The International Criminal Court in The Hague declared the wall illegal but Israel continued with it's construction.
In November Yasser Arafat died of a blood disorder and was replaced as chairman of the PLO by Mahmoud Abbas. Abbas was elected president of the Palestinian Authority in January 2005.
The attacks by Palestinian militants continued and threatened to destabilise any prospect of peace. Abbas managed to bring the militants under some form of control by deploying Palestinian police in Gaza.
Abbas and Sharon announced a mutual ceasefire and the violence abated.
In August and September the Israelis withdrew from Gaza and Palestinians reoccupied the land.
Some form of stability returns to the Middle East during the first half of 2006, there was some violence but not on the scale of recent years.
On 12th July 2006 Hezbollah fighters from Lebanon launched a rocket attack on Northern Israel and in a cross-border raid seized two Israeli soldiers. This led to the bombardment of Hezbollah strongholds in Lebanon by the Israeli military who feared there would be many more such attacks. Israel claimed they have every right to take action in order to defend Israel.
It was the rocket attack and capture of Israeli soldiers which was the trigger for the current violence in the Middle East.