Yeah. It's charming if you're Jewish. It sucks if you're not. I guess it depends on your definition of "democracy." If you mean democracy for Jewish people, then yes, Israel is a democracy.
There were a lot of non-Athenians in Athens, and they had no rights. There were lots of slaves who had no rights at all. Yes, Israel is a nation-state, but Arabs do have civil rights, and their general standing is higher than that of Christians in Egypt(or Turks in Germany). As for your dream of tolerance, where do the Muslims practice this? Where have they ever practiced this, even in that mythical place known as Muslim Spain? My particular nightmate is that a very large Algeria in their lust to take over all of Israel. More than twenty years, Naipaul's "Among the Believers" explored the psychology of the Iranian revolutionaries. I dismissed it at the time, but the deep-rooted paranoia he describes is a barrier that I do not think can be overcome by discussion. I also think of the example of India, where the Muslims dashed the dreams of Ghandi, and where they still chew on the issue of Pashmir as a dog chews on a bone. Always, where they have the power, it is my way or the highway.