As the smoke clears from the battlefield of the 34-day war in Lebanon, it would be a mistake to count the cost only in fallen masonry and fresh graves. All is changed, changed utterly, by the defeat that the whole of Israel is now debating, from the cabinet through the lively press to the embittered reservists at the falafel stall. Practically the only person in the world who claims Israel won the war is George Bush - and we all know his definition of the words "mission accomplished".

Reports that the Hizbullah leader, Hassan Nasrallah, expressed regret this week at having underestimated Israel's reponse to the capture of two of its soldiers were misleading. In fact, Nasrallah thanked God that the attack came when the resistance movement was prepared, as he was convinced Israel would have otherwise invaded later in the year at a time of its choosing.

If the fierce thicket of the Iraqi resistance stopped the Bush war spreading to Syria then the extraordinary Hizbullah victory has surely made the world think again about an attack on Iran. But the main - and maybe the most welcome - shift in the 40-year-old paradigm of the Israeli-Arab conflict is the puncturing of the belief in a permanent and unchallengeable Israeli military superiority over its neighbours and the hubris this has induced in Israeli leaders - from the sleek Shimon Peres through the roughhouse of Binyamin Netanyahu to the stumbling Mr Magoo premiership of Ehud Olmert.

The myth of invincibility is a souffle that cannot rise twice. Over the past week I have picked my way through the rubble of Dahia in downtown Beirut, now resembling London's East End at the height of the blitz, and across the south of Lebanon in towns such as Bint Jbeil whose centres look as if they have been hit by an earthquake. Here the litter of banned weapons lies like a legal time bomb - evidence of war crimes alleged by the UN and Amnesty International that in a genuine system of international justice would put Israel in the dock at The Hague. This, together with the beating Israel has received in international public opinion, is the collateral damage suffered alongside military humiliation.

Israel announced the capture of Bint Jbeil several times, but in truth it never held the town - or anywhere else for that matter - throughout the war. Despite raining down thousands of tons of high explosive on homes, schools, hospitals, roads, bridges, ambulances, UN posts, oil storage depots, electricity plants and virtually every petrol station south of Beirut (the bombers seemed to have a crazed thirst for petrol stations, while telling the world that they were kindly inviting the residents of south Lebanon to get into their cars and leave their homes for a little while), the Israelis were given a severe mauling by Hizbullah fighters when it came to boots on the ground.

Paradoxically, some believe that all this has blown open a window in which it is possible to glimpse the possibility of a comprehensive settlement of the near-century-old conflicts which lie behind the recent war. Now that the status quo ante has been swept away, we may even see an FW de Klerk moment emerge in Israel (and among its indispensable international backers).

The leader of the white tribes of apartheid South Africa waited until the critical mass of opposition threatened to overwhelm the position of the previously invincible minority, and sold the transfer of power on the basis that a settlement later, under more severe duress, would be less favourable. Israel's trajectory is now heading towards such a moment.

A comprehensive settlement now would of course look much like it has for decades: Israeli withdrawal from land occupied in 1967; respect for the legal rights of Palestinian refugees to return; the emergence of a real Palestinian state with east Jerusalem as its capital - a contiguous state with an Arab border, with no Zionist settlements and military roads, and with internationally guaranteed Palestinian control over its land, air, sea and water. In exchange there would be Arab recognition, normalisation and, in time, acceptance of Israel into the Middle East as something other than a settler garrison of the imperial west.

Just as you can't be a little bit pregnant, a settlement can't be a little bit comprehensive. Attempts - like the one more than a decade ago in Oslo - to obfuscate, shave and sculpt such a package to the point of unrecognisability will founder on the new reality.

The Arab world is waking up to its potential power. It has seen the Iraqis confound Anglo-American efforts to recolonise their country, the unbreakability, whatever the cost, of the Palestinian resistance, and now the success of Hizbullah. If there is no settlement there can only be war, war and more war, until one day it is Tel Aviv which is on fire and the Israeli leaders' intransigence brings the whole state down on their heads. Nor is it only Israel that will pay the price for continued conflict: the enduring injustice of Palestinian dispossession has already poisoned western-Muslim relations and helped spill violence and hatred on to our own streets. There is still time to choose peace. But make no mistake, with the victory of Hizbullah, a terrible beauty is born.