I had always wondered about this but have never seen it spelled out so explicitly:
Few in Netanyahu’s inner circle believe that Iran has any short-term plans to drop a nuclear weapon on Tel Aviv, should it find a means to deliver it. The first-stage Iranian goal, in the understanding of Netanyahu and his advisers, is to frighten Israel’s most talented citizens into leaving their country. “The idea is to keep attacking the Israelis on a daily basis, to weaken the willingness of the Jewish people to hold on to their homeland,” Moshe Ya’alon said. “The idea is to make a place that is supposed to be a safe haven for Jews unattractive for them. They are waging a war of attrition.”
There are actually two different points conflated here. One is familiar: That regular small-scale conventional attacks on Israel are meant to drive away residents and scare off tourists. The other point, which is newer and I think deserves more attention, is the effect that the mere development of an Iranian bomb would have on Israel's population, even absent a specific threat of its use. Would you want to live in Tel Aviv if Iran has nukes?
Meanwhile, Michael Goldfarb says he has spoken to numerous Israeli officials who consider a nuclear-armed Iran to be deterrable. In my very limited experience, that was not the case. I had the chance to talk to a couple of senior IDF officials back in early 2006, and when I asked about the feasibility of deterrence I was met with looks of disapproval and a lecture about the lessons of the Holocaust.