The most important novel ever written about Israel? Exodus of course....I have to guess you have read that one....
QBVII is great too.....does not take place in Israel but important...another great Leon Uris..
How about The Little Drummer Girl....John Le Carre
May not be what you are looking for...

I have a book on my shelf called Six Days of War by Michael Oren that I've heard great things about but have not read yet.

How about Oh Jerusalem, Cast A Giant Shadow, My Life (Golda Meir), and oh yeah---The Bible!

I have two fiction suggestions both written from the Palestinian point of view (eventually I will get around to reading an Israeli author but I'm obsessed with China at the moment.)

The Wild Thorns by Sahar Kalifeh is about a Palestinian family in the Occupied Territories in the early 1970's. One cousin returns home to fight in the Resistance and is furious that his family and neighbors are largely accepting of the current situation. Another cousin is trying to keep his family solvent. It's not just a pro-Palestian screed, this book illustrates the waste of violence on all sides. I read it for an Modern Arabic literature class in college.

The Attack by Yasmina Khadra (the pen-name of an former Algerian soldier) is about a Palestinian doctor in Tel Aviv who discovers first that his wife was killed in a suicide bombing and then that she was the bomber. He can't believe it so he sets out to find out what happened. Very good and thoughtful book and also very sad. I like how it humanizes individual Palestinians and Israelis.

Elizabeth George Speare. THE BRONZE BOW. (Not as good as THE WITCH OF BLACKBIRD POND, but set in Israel.)