My guess has always been the delicate balance of perception. Nukes are (rightfully) perceived to be beyond the basic destruction we've come to expect of war. They're a tool for annihilation. If you use them offensively the rest of the world will become so afraid of you that they'll nuke you so you can't nuke them. Israel isn't strong enough to entertain the idea that they could survive this.

This is such an interesting point. Interesting as in terrifying.

I would assume that while Iran doesn't have the material for a bomb, they have enough nasty material for an air burst to do significant long-term impact. They couldn't possibly use it unless Israel nuked them first.