A question that tourists frequently ask is do I need a hire car to see Israel?
The answer depends to a large extent on where you are going and what you plan to see. The Israeli bus system is a pretty reasonable mass transit system running frequently and being clean, safe and reliable. The railway system is less well developed, but, is really only relevant along the coast (and to Beer Sheva). The train to Jerusalem is of interest for its scenic and historical interest rather than a really viable mass transit route. The sherut (shared minibus taxi) is also an option on some of the main routes between the cities and to/from the airport.
In the main cities (particularly Jerusalem & Tel Aviv) a car is frankly a pain. It is nearly impossible to park and the traffic is rotten, and of course you have all the challenges of navigation in a foreign country (although Sat Nav / GPS definitely helps.) Our advice is that a combination of walking, bus and taxi is best. It also allows you to see more and enjoy the atmosphere more. (On the subject of taxis note however, that taxis are limited to 4 passengers unless you get lucky & find one of the handful of bigger ones and the rule is pretty strictly enforced. Within cities taxis are not all that expensive and so make a reasonable transport option.)
If you are planning to visit areas out of the main cities – for example The Galilee, Golan, Negev and especially if you have a family or group to move then a car is definitely more convenient. If you want to see things and stay in sort of out of the way places (villages and zimmers) then a car becomes almost essential – it will just be too inconvenient and time consuming to get around by public transport. On the good side driving in Israel is reasonably convenient although it does have some local quirks and customs.