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To put your travels of Israel into context, it's helpful to learn about the struggles of the nation. The first book travelers should read is Thomas Friedman's nonfiction From Beirut to Jerusalem. This wonderfully written book gives insight into the political history of the region, which is essential for understanding where things stand today. Of course, if you'd like to delve farther back into the history, you could start with both the Old and New Testaments, as so much of what you will see will be biblical in nature. For an overall view of the entire region, Bernard Lewis's The Middle East is a good starting point.
While the guidebooks can tell you what to see in Israel, it's the literature that really gives you a sense of the heart of Israel. Just about any book by Israeli author Amos Oz will be outstanding reading for your travels, but in particular, My Michael is a stunning work. The lush writing will captivate you, but the descriptions of Jerusalem post-WWII shows what Israel was like in the beginning of statehood. For a more modern view on Israel, Risa Miller's Heavenly Heights follows a group religiously observant American Jews who make aliya (Jewish people who return to Israel to live) to a West Bank settlement called Heavenly Heights. For another glimpse into the lives of the Orthodox in Israel, Ruchama King's Seven Blessings is a beautiful story about matchmaking. Superb writing and it would be a wonderful book to read while traveling in Israel.
For a view on the other side of Israeli politics, consider Michael Gorkin and Rafiqa Othman's Three Mothers, Three Daughters: Palestinians Women's Stories, in which the two interviewed six Palestianian women living in various parts of Israel. Amira Hass's Drinking the Sea in Gaza is rather controversial but it definitely portrays a different view of Israel than what you'll get from touring Tel Aviv or Jerusalem.
Definitely not a book you could call high literature--in fact the writing at times is downright poor--but James A. Michener's The Source is fascinating in re-creating the events of a single location in Israel over the course of thousands of years. The story takes place on an archelogical dig, and as an artifact at each layer is uncovered, the story of that time period is told. The stories are so interesting that the choppy writing is forgiven.
It's hard to find, but if you have the opportunity to watch the Israeli TV show (subtitled in English) Florentine, it's well worth it! This Friends-like show follows close to a dozen young people (post-Army) living in Tel Aviv. Really shows you what life is like on a day-to-day basis for young people in Israel.
For more local color in the realm of fiction, try Etgar Keret's The Nimrod Fllipout and Savyon Lebrecht's A Good Place for the Night. Both are books of short stories translated into English as easily available.