In her last report from the Middle East, Margaret Warner examines the Israeli reaction to Hamas' landslide victory in Palestinian elections.

MARGARET WARNER: Less than 24 hours after official returns from the Palestinian election showed a landslide for the radical Islamic group Hamas, relatives of some of Hamas' 1,000 suicide bombing victims descended on a cafe in the center of Jerusalem.

MAN: We by our own hand are building a Hamas land in the center of Israel --

The cafe itself had been hit by a suicide bomber in 2002. And these victims' families expressed horror that a terrorist organization was about to take over the Palestinians' government right next door.

BATTIA BEHAR, Victim's Mother: I felt that the heaven fell on my head.

MARGARET WARNER: Isaiah and Battia Behar lost their 23-year-old son Eran in a suicide attack less than a month after the 1993 Oslo peace accords were signed.

ISAIAH BEHAR, Victim's Father: The world had to understand the real face of the Palestinians, and what is their aim. Their aim is to abolish our existence.

MARGARET WARNER: At another cafe just a few blocks away, news of the Hamas victory was the talk at every table -- but Israelis there were reaching a very different conclusion.

The coffee shop's owner, Eli Cohen, talks to lots of his patrons -- and he said Palestinians had merely exercised their right to throw out an incompetent, corrupt government.

ELI COHEN: They think that Hamas will do better, not for the terror. This is my opinion. I don't think they vote for the terror. I think they vote for their jobs and foods and the kids, not for the terror.

And then there was Rabbi Arik Ascherman, who works with Palestinians to protect their rights against the Israeli occupation.

ARIK ASCHERMAN, Rabbis for Human Rights: I (a) understand that we also share some responsibility for what happened, and (b), still have some hope that maybe Hamas will decide they must now be politicians, diplomats, states-people, and not terrorists.

MARGARET WARNER: Israelis of all backgrounds and all political stripes have now had a week to debate the Palestinian results, and ponder what they mean for Israeli society and security and the prospects for Middle East peace.

A sampling of the debate can be found at the historic Yehuda Mehane Market. The market is popular with shoppers and traders of Sephardic descent - Jews with roots in Spain, Portugal and North Africa who tend to be conservative in their views.

Eliezer Reiseman, whose mother is Yemenite, is a construction worker here. He thinks the Hamas victory could trigger a dramatic shift in Israeli attitudes.

ELIEZER REISEMAN, Construction Worker: It's definitely going to be hard right. The political talks are going to stop, because they are not going to talk to Hamas, I guarantee that. You can't talk to a thug.

MARGARET WARNER: Shop owner Uziella Hzi, who sells home-made herbal remedies, is also of Yemeni descent. He's a well-known figure at the market, a traditional healer, and his on-the-spot diagnosis of the political scene is that Israelis will take a wait and see attitude toward the Palestinians.

UZIELLA HZI, Yemenite Trader: The Israeli already grew up a little bit and they want to go in the center -- not too left and not too right; they want to be in the middle way.

MARGARET WARNER: But the man who captured this Israeli yearning for a calm center -- Prime Minister Ariel Sharon -- lies in a coma in this Jerusalem hospital -- felled by a stroke just two months after leaving the hard-line Likud Party to form one of his own, Kadima.

Acting Prime Minister Ehud Olmert is trying to win next month's Israeli elections for himself and a full Kadima slate of old Likud and Labor figures who joined Sharon's party.

Olmert has been engaged in a delicate balancing act since the Hamas win. He's talked tough about not dealing with a Hamas-led government that doesn't renounce violence and its commitment to destroy Israel.

Yet Olmert quietly urged the West not to cut all financial aid to the Palestinian authority immediately, for fear of sparking its collapse.

And he went forward with his plans to move Israeli settlers out of illegal outposts on the West Bank. Just yesterday, Israeli police battled settlers in the town of Amona -- injuring more than 200 -- with greater violence than the withdrawal from Gaza last summer. Aides say Olmert wanted to let voters here know he's just as tough as Sharon.

Ariel Sharon did the near impossible in Israeli politics. The former hard-liner created a popular new centrist party built around the notion that Israel's security would be best assured not by fighting or negotiating with the Palestinians endlessly, but by disengaging from them on Israel's own terms.

His unilateral withdrawal from Gaza, and the construction of a physical barrier between Israel and the West Bank enjoy wide popular support here. But the question Israelis are facing now, after the shock of the Hamas landslide, is can this new center hold?

Avi Dichter believes that the political center can hold. And he just might be living proof of that. He's the former head of Shin Bet, Israel's domestic intelligence agency -- and he persuaded Sharon to build the controversial barrier that now divides most of Israel and its settlements from the Palestinians in the West Bank.

Palestinians say it imposes collective punishment on their people. It separates Palestinian family members from one another and their land, and subjects Palestinian workers to long, humiliating waits at checkpoints.

But Dichter says the wall cut suicide bombings by 90 percent in the North, after it was completed there two years ago. Equally essential, he insists, was the targeted assassination policy he created -- to kill Hamas terror masterminds.

Hamas has observed a cease-fire for more than a year. Yet Dichter warns that even newly elected Hamas parliamentarians -- if found to be planning or authorizing attacks -- won't be immune from being targeted -

Yet this old hard-liner -- like his prime minister -- has moved to Israel's new centrist political ground, to become one of Kadima's top candidates for parliament.

AVID DICHTER, Former Israeli Intelligence Chief: As a security man I was responsible for counter-terrorism. But now as a politician I understand that it should be counter-terrorism against the terrorists, and talks with the other part of the Palestinian leadership or the Palestinian people.

MARGARET WARNER: Do you think the Hamas landslide will push them back further to the right?

AVID DICHTER: No I don't think it's, first of all we don't see it in the polls after the Hamas landslide. Second, I think that the Israelis are rational people; the majority in Israel prefer to be in the center and not going, you know, like drunk people to the right and to the left just because one event or even two events.

MARGARET WARNER: Benjamin Netanyahu hopes that Avi Dichter is wrong. The former prime minister is the new leader and top candidate of the Likud Party, and at his Tel Aviv headquarters he is busily planning Likud's campaign.

He says Israel's unilateral withdrawal from Gaza boosted Hamas to victory because it could claim that terror worked. He says that Israel should stop any further withdrawals -- and move the barrier eastward, deeper into Palestinian land -- if Hamas sticks to its radical agenda.

BENJAMIN NETANYAHU: Now we have what is clearly an unreasonable partner on the other side - if you will, Taliban or Ayatollahs, which is what they are, even if they speak softly for a while.

MARGARET WARNER: But hasn't the Israeli public essentially said, we're sick and tired of negotiating, we're sick and tired of fighting, let's just build a fence, build a wall, leave them to themselves, and we've got our own defensible borders?

BENJAMIN NETANYAHU: Whatever else our policy should have, it must reverse Palestinian and Hamas expectations that Israel is just going to cave under.
You say Israel is too weak, Israel is too tired. We cannot be tired. And we cannot be weak. We have to be strong and willing to take a stand against those who will annihilate us. What does that mean in practice? It means we stop unilateral retreats. We announce that we will not do unilateral retreats. We tell Hamas that it's not going to work any more.

MARGARET WARNER: What is not that clear is whether Benjamin Netanyahu's alarmist message is going to catch on. Even in the traditionally conservative community of Russian immigrants -- a vital voting bloc, with fully 20 percent of Israel's population -- people don't seem particularly exorcised over what had happened.

Leon Smolar runs a small delicatessen that caters largely to a Russian clientele looking for a taste of home. He favors a pragmatic wait-and-see approach vis-à-vis Hamas, and shows little concern about any threat to Israel's security.

LEON SMOLAR: I served here in the army. I was in the Yom Kippur War. I know Israeli army, and I know that we are strong, strong enough to withhold this thing, so I don't particularly worry.

MARGARET WARNER: That sense of tough-minded pragmatism seems to be shared in liberal communities too.

The Ramat Aviv Mall in Tel Aviv is where the upper middle class goes to shop. These Ashkenazy Jews of European descent have been the backbone of the Labor Party, and the peace camp in Israel. Three years ago, young people told us, their parents wouldn't let them come here for fear of a bomb attack. But the wall and the year-long cease fire have made them feel safe, and the place was bustling this Tuesday night.

Thirty-five-year-old lawyer Assi Lavi, a mother of two, was picking up a few items of clothing. She's voted for far-left parties in the past, but now finds herself drawn to Sharon's tough-minded centrism. She's even thinking of voting for his new party, Kadima, this time around.

ASSI LAVI: We saw that the walls, it was a good thing, there were less attacks in the country.

MARGARET WARNER: Some former Likud supporters here seemed to be deserting their old party too. Aspiring lawyer Adin Arbagil, sitting at an Italian mall cafe with her mother, said she's all for Sharon's policy of unilaterally setting Israel's boundaries, and withdrawing from Palestinian territory.

ADIN ARBAGIN: I think this is the way to have the Palestinians have their own country, and to separate us from them. We don't need to be part of them. It just make all the killings, and it's not worth it.

MARGARET WARNER: Conventional wisdom has it that the left has been marginalized by the Hamas landslide. One place to gauge that is on the campus of Tel Aviv University, usually a hotbed of left-wing politics.

And coincidence or not, when Amir Peretz, the new leader of the Labor Party, came to talk to students two days ago, he couldn't muster a large enough audience to fill a small grassy quad.

Leading Labor Party lawmaker Itzhak Herzog served in Sharon's cabinet as housing minister. The son of a revered former Israeli president, he was raised in the corridors of Israeli power. He's running for re-election on the Labor slate but says over the past five years, even the left has moved toward the Sharon-defined center on security issues.

ITZHAK HERZOG: The peace camp has moved to the center because the peace camp has seen two things -- has seen violent ruthless terror on the one hand, and yet something more reasonable perhaps with the pull-out from Gaza, unilateral steps -- and this illusionary sweet feeling that peace is behind the door basically evaporated.

MARGARET WARNER: Herzog says the left still believes in a negotiated final settlement with the Palestinians, and hopes Hamas will moderate its views. But Hamas' landslide victory has chilled expectations that that might come soon.

ITZHAK HERZOG: I would say that the illusion that all is well and our adversaries are not really enemies and they will adapt to all the norms of, of the family of nations has not proven right.

MARGARET WARNER: And so today, with all the mainstream political parties endorsing the barrier between Israelis and Palestinians, the government is hastening to finish it by year's end. Yet the Jewish state and its politics could still be whipsawed by what happens on the other side of the barrier - be it a new campaign of terror against Israelis, or civil war among Palestinians; the imposition of Islamic law, or economic collapse.

Both Israelis and Palestinians are entering new political eras, but they are forced to travel side by side, just as they are forced to share this beautiful but conflict-driven land.