Towards the end of the 1980s, the interactions between Israel and the Palestinians changed with the intifada, a series of related uprisings in occupied territories. During this brutal period in Israel's history, demonstrations and strikes occurred bringing destruction to Israeli soldiers and civilians. Over the next few years, changes in the government occurred, eventually leading to its encouragement in a wave of immigration of more than 200,000 Soviet Jews into Israel. The Palestinians and Israeli Arabs resented this governmental act and the economy of Israel was devastated. In 1991, with the Persian Gulf War as the topic of news, the Palestinians openly favored Iraq and many Scud missiles struck Israel, destroying much of the area near Tel Aviv. Israel did not fight back and was instead aided by the United States.

In October of that year, peace talks first arose between Israel and delegates for the Palestinians and neighboring Arab states. In June of 1992, Yitzhak Rabin, leader of the Labor Party, formed a new government after winning the parliamentary election. Prime Minister Rabin and Palestine Liberation Organization (PLO) Chairman Yasir Arafat flew to Washington, D.C. in 1993 in order to sign a peace agreement, making occurrences in the Middle East take an unexpected turn. This signing of the treaty created an allowance for Palestinian self-rule throughout certain parts of Israel.

During July of 1994, Prime Minister Rabin and King Hussein of Jordan signed a peace agreement ending forty-six years of war and problems between the two nations. In the same year, Israel reached diplomatic relations with the Vatican. Israel further advanced its foreign relations when members of the Gulf Cooperation Council announced that they would relax their role in the wider Arab economic boycott of Israel. This action gave the country's economy a significant advancement. Although Israel and the PLO had signed their peace treaty in 1993, it was slow to be implemented. It was not until 1995 that a second peace agreement was signed, this time promising Israel's withdrawal from all Palestinian towns in the West Bank with the exception of Hebron. These towns were to remain under the Palestinian Authority.

On November 4, 1995, Prime Minister Rabin was assassinated by Yigal Amir, a right-wing Israeli who was opposed to the recent peace process which had been under way. Rabin was succeed by Shimon Peres who continued to negotiate with the Palestinians.

Throughout 1995 and 1996, Jews from the republics of the former Soviet Union continued to immigrate to Israel, climaxing when a fundamentalist Islamic group called Hezbollah shelled Israeli villages with rockets from Lebanon in 1996. Israel counterattacked and, through a technological error, bombed a UN refugee center in April, killing nearly 100 civilians. There had been a continuing Israel-Lebanon border conflict since almost 1970, with major Israeli military operations directed against Palestine armed groups around 1980 and against Hezbollah in 1993. The Ta'if Agreement of September 1989, brokered by the Arab League, had ended the Lebanese civil war and in 1991 all Lebanese armed groups with the exception of the Hezbollah had been disbanded. Because of this, Hezbollah was able to conduct military activities against Israel's occupation of the "security zone". On July 25, 1993, after the killing of several Israeli soldiers in southern Lebanon, Israel launched Operation "Accountability" which was supposed to eradicate the threat posed by Hezbollah and force the civilian population to put pressure on their government to repress Hezbollah.

An understanding was created after this event which stated that Lebanon would no longer fire rockets at northern Israel so long as Israel would not attack civilians or civilian targets in Lebanon. Even with this unwritten agreement, retaliatory attacks continued involving Lebanese civilians outside of the limits of the "security zone" and Israeli civilians in northern Israel.

On April 11, 1996, Israel launched Operation "Grapes of Wrath" with a duration of seventeen days. At this point, Israel began to broadcast through a radio station to the inhabitants of various Lebanese villages and towns to evacuate and "save their lives". Likewise, the Hezbollah issued warning to civilians in northern Israel. Over the next few days, many Lebanese and Israelis were forced to flee their homes. On April 26, a new, written understanding was created. This called for civilian security and established a Monitoring Group made up of the United States, France, Syria, Lebanon, and Israel to supervise.

In May of 1996, Benjamin Netanyahu, leader of the conservative Likud Party, defeated Peres in an extremely close election for Prime Minister. The May election marked the first time in Israeli history when the prime minister was elected directly by popular vote.