I can see a potential for it escalating to the point of a civil-war-type vision; however, there probably will be outsiders that butt their noses into the conflict (i.e. those allied with the two sides) and it has the potential to grow and escalate much larger than it should under normal circumstances.

The counterweight to this is that the war between the Israelis and Arabs from Jordan , Syria and Egypt (now called Palestinians ;) ) has been going on for close to 100 years, right? So why hadn't it escalated to this degree while the other wars were going on?

My answer would be, not likely. It is not likely that there will be a WWIII induced conflict due directly to the conflict between the Palestinians and the Israelis unless an outside source instigates it... Both sides of the fight are pretty independent as far as how they feel they can control their side. In the end, the rest of the world instigating a larger-scale battle would be the only feasible method of escalation to a WWIII-type scenario in my eyes.
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Sadly, this war is locked into fairly predictable patterns. The sides are well established, and nobody who isn't already part of it wants in. The other Arab leaders will protest, but they don't have a real interest except keeping their own populations from getting too rambunctious. The Israelis are the only side with nuclear weapons, and without an opponent who can threaten them militarily, escalation to that point is nearly impossible.
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There is but one God, and the Arabs, Christians and Jews all claim to believe in the one God.

So why do we hear what men say about the Holy Land and ignore what God has said?

"Peace on Earth is God's Will to all Men"

"Blessed are the Peacemakers"

"Peace on Earth and Good Will to all Men"

God has spoken, but the crowds hear not the words of God, but the words of men, who profit from war and dissent.
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Not quite becoming world war 3 because this war has been going on and off for such a long time that it is expected i.e it's shock value has been minimized . if it was ever to have escalated into something akin to a world war then that would have been during the Israeli-Six Day War when I sraeal fought with 4-5 of it's Arab Neighbors.

You will recall that WW1 was caused by many underlying dynastic and imperial factors but the trigger was the assassination of the Archduke of Austria by a Bosnian-Serbian Student as party of a larger conspiracy. WW2 was essentially a continuation/extension of WW1 ,Germany Invaded Poland on the first of September 1939 largely to protest the sanctions that had been imposed on her after her defeat in the first world war.
Source(s):
http://en.wikipedia.org/wiki/World_War_I
http://en.wikipedia.org/wiki/World_War_2

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Yes.
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If, and only if, the rest of the muslim nation becomes involved in the war.
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