Can a religiously defined state be a democracy?

In the debate over the future of Israel and the Palestinian Territories the question of the status of Israel as a Jewish nation is always central to the conversation (and conflict). Israel is defined as being a democracy (and it is) that grants religious freedom to its citizens, but it also seeks to be a Jewish State. With 20% of its citizens being Arab, the question is how does this reality square religious and national identities. Richard Boudreaux's article in the LA Times entitled: "Arabs say Israel is not just for Jews" describes a manifesto written by mainstream Israeli-Arabs that call for power sharing, and by that create a bi national state.
These Arab leaders want more representation and a greater sharing of resources -- thereby ending what they see as a second class status within Israel. This has, as one would expect, created considerable angst within Israel's regnant Jewish community, both left and right.
What the article does is raise the difficult issues of how a modern democracy balances collective and individual rights, disburses resources, and allows representation by minority groups. Israel's Jewish community sees Israel as its one bulwark against disenfranchisement in the world -- a sense of disenfranchisement that led to pogroms and the Holocaust. Arabs and Palestinians, however, see the loss of identity and land. But what is true of Israel, is also true in other lands and places.
In Turkey, for instance, the Orthodox community isn't allowed to open seminaries to train priests for its church. In much of the Islamic world, Christians and Jews must keep to themselves and worship in private. Much of Europe still has state supported churches. For much of our history as a nation religious minorities have experienced at least a de facto status as second class citizens -- unless they were part of the Protestant mainstream.
So, how does one balance a state's religious identity and true democracy? I'd love to hear your thoughts, but first read the article!

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