The Holy City is very much at the centre of the eight-day Hanukkah holiday which is celebrated by Jews around the world and which started this week. Hanukkah, also known as the Festival of Lights, is when Jews remember the restoration and re-dedication of the Second Temple in Jerusalem after the Maccabean revolt in 164 BC. The festival is marked each day by the lighting of a candle on a distinctive nine-branched 'menorah' candelabrum. Songs are sung, presents are swapped and children play with small spinning tops called 'dreidels'. Hanukkah is a minor holiday in Jewish theological terms (it has no explicit basis in the Torah, or Jewish Bible), but in recent decades it has become (with Passover) as important to Jewish identity as Christmas is to Christians. In fact, the two Judeo-Christian festivals often overlap in December.

Yet in Jerusalem today there is precious little evidence of festive spirit. The city's Jewish residents are tense after a number of recent terrorist attacks by Palestinian militants, reportedly enraged at what they believe are increasing Israeli encroachments on the Al-Aqsa Mosque, one of Islam's three holiest sites. The most shocking incident was the cold-blooded massacre of four rabbis and another worshipper in a West Jerusalem synagogue on 18 November. There have also been several deadly 'hit-and-run' attacks on Israeli Jews, including one in which a three-month old baby was killed.

Palestinian residents are even more fearful after the brutal murder of a Palestinian teenager in July. Sixteen-year-old Mohammed Abu Khdeir was kidnapped by Jewish extremists from a street in the previously peaceful East Jerusalem suburb of Shu'fat, and then beaten and burned to death. This was followed in November by an arson attack, also by Jewish militants, on Jerusalem's best known Jewish-Arab school. The arsonists, believed to be West Bank settlers who oppose any inter-mingling of Jews and Palestinians, had scrawled racist graffiti on the school walls, including "You can't coexist with a cancer," and "Death to Arabs".

During my current visit to Jerusalem I have been struck by the palpable fear in the eyes of my Palestinian friends. Life has always been difficult in East Jerusalem, occupied by Israel in 1967, with significant discrimination against the city's Arab residents, house demolitions and exponential growth in the number of Jewish settlers (now numbering at least 300,000 in the city's Eastern half) taking what was previously Palestinian land. But the climate of violence has moved the fear to a new level. "I am frightened to let my teenage children go out at night," one Palestinian parent told me. "They are safer in Ramallah or Bethlehem than in Jerusalem these days." Another Palestinian friend told me that in 40 years he had never known the situation in Jerusalem to be so tense: "I am seriously wondering whether I should take my family and live abroad. This is not my city anymore."

It is not just sectarian violence on the streets of Jerusalem which has caused a dark cloud of depression to descend on the city's Palestinian residents. At a national level there is little reason for optimism. Elections have been called for Israel's Knesset on 17 March 2015, but most observers believe that the new parliament and government will be even more right-wing, rejectionist and pro-settler than its predecessor. Many of Israel's 20 per cent 'Arab' population, as Israel insists on calling them in denial of their Palestinian identity, will probably not even vote, since they believe Israel's political system has little to offer them. This will be especially true if the government of Prime Minister Netanyahu succeeds with a controversial constitutional amendment which would delist Arabic as an official language and subordinate Israel's democratic status to its identity as the "nation state of the Jewish people" only.

There is no more reason for hope at the international level. Emboldened by growing international support and their designation by the UN General Assembly in November 2012 as a 'non-member observer state' of the United Nations, the Palestinian leadership is trying to press its apparent (but almost certainly illusory) advantage. In the coming weeks it will ask through Jordan for a legally-binding but largely symbolic vote on full statehood in the UN Security Council. The United States has consistently used its Security Council veto to oppose such moves and says it will continue to do so on the basis that it opposes all "unilateral measures" which would pre-judge diplomatic negotiations. The bitter irony of this stance is that the US has done virtually nothing to prevent the biggest "unilateral measure" creating "facts on the ground", which is Israel's settlement policy in East Jerusalem and the West Bank. Indeed, an increasing number of observers believe that 300,000 settlers in East Jerusalem and 400,000 in the West Bank make a two-state solution impossible to achieve. But then Palestinians ask themselves: how viable is the only alternative, a single bi-national state with Jewish Israelis and Palestinians living side-by-side in a genuine democracy? This looks like a fantasy if Netanyahu succeeds in moving Israel irrevocably in the direction of Jewish 'ethnocracy' with his nation-state bill.

The United States is the only global power that can have any influence over Israel at this critical point in the Israel/Palestinian dispute. Yet Netanyahu is content to play the long game, seemingly confident that he will outlast President Obama's Democrat administration and that he will have a much more amenable and pro-Israel Republican president in the White House after 2016. This will allow him to expand his settlement programme in East Jerusalem and the West Bank (one Israeli minister has spoken of a target of 600,000 settlers in the West Bank alone) and to drive what will probably be the final nail in the coffin of a negotiated peace settlement that allows Israelis and Palestinians to share the land equitably.

But what then of Palestinian national rights? What about the Jewish extremists who are now so much stronger than when one of their number murdered Prime Minister Yitzhak Rabin in 1995 as revenge for his moves towards a permanent peace with the Palestinians in the Oslo Accords? It is these questions which weigh heavily on the minds of my Palestinian friends in Jerusalem. As we enter Hanukkah, and approach Christmas, we owe it to them to take to heart the words of Psalm 122:6: "Pray for the peace of Jerusalem". The Holy City certainly needs our prayers right now.

Jeremy Moodey is Chief Executive of Embrace the Middle East, the Christian development charity.