After disappointing home draws against Luxembourg and Azerbaijan in their last two World Cup qualifiers they failed to convert possession and territory into goals before sucker punch strikes from Lior Refaelov (77) and Eden Ben Basat (84) cost them dear.
Captain Steven Davis went closest to getting his side on the scoresheet, but with three points from five matches in Group F and a winless run of 13 games, their prospects look grim from here.
Davis was denied in unlikely circumstances just after the half-hour mark, his close-range shot deflected by goalkeeper Dudu Aouate's face and he was almost on target in the second half with a powerfully hit effort from 20 yards.
Other than that Northern Ireland's positive play and hard work failed to yield enough clearcut opportunities.
For Michael O'Neill, who has not won in nine matches at the helm, it was a bitter pill to take.
Having restored Sammy Clingan and Martin Paterson to his starting XI in the absence of suspended pair Chris Baird and Kyle Lafferty, he will have been pleased by his side's first-half display.
Israel looked like they would grab the game by the scruff of the neck when Swansea striker Itay Shechter struck the outside of the post from a short-corner routine, but thereafter the hosts had much the better of things.
Shane Ferguson's enthusiasm on the left was the catalyst, a neat flick and a testing cross lifting his side.
Niall McGinn was the first to take his lead, beating Rami Gershon on the right before slightly over-hitting his cross.
A lengthy spell of possession ended with Paterson outmuscled by Tal Ben Haim as he looked to latch onto Davis' through ball in the 18th minute.
Chris Brunt, so often short of his West Brom form when on international duty, was next to step up.
He worried Israel with a free-kick and then almost succeeded in teeing up Paterson with a low shot that was touched wide by the Burnley man from the edge of the box.
Northern Ireland's industry almost earned them a goal just after the half-hour mark when Paterson battled to win possession on the byline and cut back to Davis.
The skipper looked sure to convert from six yards but goalkeeper Aouate saw a powerful shot hit him flush in the face before Ferguson's reaction header was swept from the line by Yuval Shpungin.
Follow up efforts from Brunt and Aaron Hughes were blocked and the chance was gone.
They continued to press without reward, Gareth McAuley's drilled ball across the six-yard line going unconverted despite numerous bodies in the box.
The second half started slowly, Northern Ireland doing most of the pressing but without creating anything concrete.
The seven minutes after the restart, Israel almost caught their opponents out.
Shechter intercepted a throw-in and when Ben Basat fed Maor Melikson, Roy Carroll needed to be alert to save at his near post.
Davis then went close to a stunning opener in the 59th minute after McGinn's pacy counter-attack drove his side forward.
The Southampton midfielder took down a loose ball with aplomb and then sent a 20-yard rocket inches wide of the top corner.
Paterson twice appealed penalties unsuccessfully, Ben Haim and Aouate both cleared by the referee after seeing the striker go to ground.
Neither case looked compelling, but Paterson was aghast.
With 17 minutes to go O'Neill made his first change, sending on Aberdeen's Josh Magennis for a competitive debut in place of Ferguson.
Northern Ireland continued to search for the breakthrough, Daniel Lafferty's curled cross nodded away from the waiting Paterson.
Then, in the 77th minute, Israel defied the run of play to take the lead.
Israel substitute Refaelov was the scorer with a delightful finish across Carroll, having been teed up by a smart one-touch pass from Shechter.
O'Neill sent on Pat McCourt and David Healy in a bid to change his side's fortune but instead they leaked a second six minutes from time.
The otherwise excellent Evans botched a defensive header, Shechter broke and Ben Basat finished clinically.