Schoolgirls take cover next to a bus during a rocket attack from the Gaza Strip, on March 12, 2012 in Ashdod, Israel. (Uriel Sinai/Getty Images)

After four days of rocket shelling and air raids—which began last Friday when Israeli forces assassinated the secretary general of the Popular Resistance Committee, Zuhair al-Qaissi— one million Israelis in the south of the country and a million and a half Palestinians in Gaza returned to “normal”: a state of constant tension and fear about when the violence will start up again. This particular round came to an end on Tuesday when Egypt brokered a ceasefire between Palestinian militant groups, led by the Iranian-sponsored Palestinian Islamic Jihad, and the IDF. But it’s hard to overstate just how fragile the ceasefire is: Early Wednesday morning, the IDF hit two sites in northern Gaza that it claims were terrorist hubs, and the rocket fire from Gaza could resume any day.

Between Friday and Tuesday, nearly 40 Palestinians—mostly terrorists—were killed, and heavy damage was inflicted to property in Gaza. More than 200 rockets and mortar shells were launched from Gaza into Israeli towns in the south, including Beer Sheva. Several Israelis were injured.

As expected, both sides are claiming victory.

“We taught them a lesson with a hint that they should think twice before they contemplate whether to mess with us again,” a senior military officer told me. Israeli security chiefs are especially proud of the success of the state’s new anti-missile system, Iron Dome. After a year of fits and starts, the system managed to successfully intercept nearly 80 percent of the Grad rockets launched from Gaza during the four-day skirmish. (The Grad rocket is an improved version of the old Soviet-made Katyusha and has a range of up to 40 kilometers.)

Iron Dome’s achievement is magnified by the fact that by intercepting the rockets it’s not only defending the Israeli civilian population, but frustrating the goal of groups like Palestinian Islamic Jihad, which is to inflict as many casualties and as much damage as possible.

Even though they didn’t manage to kill any Israelis, Palestinian Islamic Jihad held a “victory parade” yesterday in the streets of Gaza. Spokesmen from the organization boasted that they defeated the almighty Israeli military machine. And one Grad apparently landed only 32 kilometers from Tel Aviv.

Propaganda aside, who won this latest round? It’s hard to swallow, but Israel is the bigger loser.

For one, the Jewish state paid a huge economic price. One Grad rocket costs roughly $1,000. One intercepting Iron Dome missile costs $100,000. On average, Israel fired two Iron Dome missiles per Grad. Thus, intercepting 40 Grads worth $40,000 cost Israel $8 million. Plus, while the rockets were flying, some 200,000 Israeli students didn’t go to school, and hundreds of thousands of Israelis were confined to shelters and did not go to work.

More significant than the economic hit are the strategic ramifications. For months, Prime Minister Benjamin Netanyahu and Defense Minister Ehud Barak have waged an aggressive campaign to persuade the world—especially the United States—that the single most important threat to Israel and the international community is Iran’s nuclear program. This information campaign reached its zenith earlier this month when Netanyahu met with President Obama at the White House to reiterate the grave danger the Islamic Republic poses to the West.

By focusing solely on Iran, Netanyahu masterfully took the Palestinian issue off the world agenda. But this latest exchange reminded the world that the Palestinian issue is still very much alive and kicking and needs to be negotiated and resolved.

But the biggest reason Israel lost this latest round is that it revealed the vulnerability of the Israeli home front—and not even to Hamas, but to the much smaller group of Palestinian Islamic Jihad. Watching the way the south of the country shut down under a barrage of Grads, one can only imagine what could happen to Israeli towns and cities if a war breaks out with Iran.

The whole of Israel is targeted and within reach of the 400 Shihab missiles in Iran. While one Grad carries 15 to 18 kilograms of explosives, each Shihab has a warhead of 750 kilograms of explosives. In other words, one Shihab is worth 50 Grad rockets. And Israel has no effective anti-ballistic system. The Arrow system, which is meant to deal with the Shihab, is still being developed. It is also widely assumed by most experts that if a war with Iran breaks out, the Lebanese pro-Iranian Shiite movement of Hezbollah will jump on the bandwagon. Hezbollah, according to Israeli military intelligence estimates, has around 40,000 rockets and missiles. Many of them are capable of targeting anyplace in Israel, including its nuclear reactor, air fields, military bases, electric power stations, other strategic installations, and of course all Israel’s cities, including Tel Aviv.

In the wake of the past weekend, Israeli leaders have to be asking themselves a simple question: Is it worth initiating a crisis with Iran? Will the Israeli public be able to cope with Iran’s response?