If Iran attacked Israel with a nuclear weapon, the U.S. and Israel would wipe out large sections of that country. Tehran is a sophisticated place that knows this perfectly well. Most Iranians I know think that their president's obscene rhetoric is diversionary -- a way to sell himself as the spokesman for the Muslim "street". They don't like it and they don't back it. But they are proud and don't like being told that they alone in the neighborhood can't have nuclear autonomy: they are surrounded by nuclear powers (India, Pakistan, Russia and Israel, not to mention the American fleet). Why should they not feel paranoid? The nuclear threat to Tehran is far greater than the nuclear threat to Tel Aviv.This is, indeed, nuclear deterrence.
Although I should point out that Iran does not have nuclear weapons.
That Tony Judt interview contains much more of Judt's views on Israel. Definitely worth reading.