Currently the Bush Administration is seeking to use diplomacy with Iran, but has not taken military solution off the table. Assume talks drag on and during this phase Isreal has what they believe to be credible intel on an imminent attack and decide to nuke Iran first. TV news coverage from around the world show devastation in a medium sized Iranian city where the suspected nuke was located. Isreal acted in what they believe to be their self defence , but any evidence is either vaporized or buried in radioactive debris. What happens next? How does world react?

I don't see Israel using nukes for this situation.   I think the Israeli nuke is for a case if there's ever another war where the Arabs gang up on them and actually are going to win.   The nukes are their bargaining chip for their survival.   In other words if they get beat conventionally they will assure that they take many with them......it's MAD only one sided.  

 

I also think with the news of the 3000 Centrifuges being employed, this weakens Israel signficantly.   But there's always the word of the US that if you nuke an ally of ours we will use ours in their defense.  Only problem is if it is a Conventional victory against Israel we won't use nukes...but many probably will not allow that to happen to be honest.  I am pretty sure the US wouldn't and probably quite a few European Allies.

Would America really use her nuclear arsenal in retaliation against a nuclear strike on Israel?

 

I would very much doubt it.

 

If Israel is attacked by a nuclear weapon, it will most likely (in my opinion) be from a non-state actor, such as a terrorist group.  A terrorist group does not have a clearly defined target to launch your American retalitory nuclear weapon against, which poses obvious problems.  I doubt Iran or Syria would launch a nuclear strike against Israel, should they acquire the capability, for the fear that Israel would manage to retaliate - simple deterrence theory.

 

You have to consider that if a nuclear weapon or five land in Israel, much of the (tiny) countries infrastructure will cease to exist.  A nuclear weapon strike or two against Iran on the other hand would be lost in the desert.  Once Israel has been destroyed, whats in a retalitory strike for America?  At best they destroy a major facility or two in Iran, and send a srong message in the process.  At worst, China and Russia are startled into retaliating on the behalf of Iran, seeing America loosing off nuclear rockets, and before you know it the whole thing has escalated until MAD.  Thats one Hell of a gamble for an American president to take.