Of course Israel would support Mubarak, they have a treaty with him. Better the known dictator than the unknown democracy. That seems to be the root of middle east policy for the U.S. as well.
It's telling that when the settlers were removed from the Gaza strip there was little outcry amongst the general Israeli population, despite rhetoric from the settlers on how they'd hold out to the end.
Having lived in Israel, I assume you are more in tune with things over there. Since the west bank is not apparently as radicalized as Gaza, I wonder what would happen if Israel went back to the 1968 border and left the settlers to be a part of Palestine. That is essentially what happened to the Arabs in 1948. Give them the choice, live with dual citizenship under a Palestinian state or leave.
Also, I still believe that the U.S. position is influenced by the Israeli lobby, whose campaign contributions and ideas are very much in play. Is there any other explanation for the U.S. being the lone veto in the U.N. We in the U.S. don't seem to get the same news coverage that the rest of the world sees. That is evident by watching other sources such as BBC news, and even, Al Jazeera. Admittedly, Al Jazeera may be a bit slanted, but there are real reports there that we never see in our press, be it written or aired. When was the last time anyone saw reports and videos of home demolitions, or peaceful demonstrations at the wall being broken up with tear gas and rubber bullets. Even our news stories are always "accordin to the IDF.
As you pointed out, the Israeli form of democracy leaves a lot to be desired. I still don't understand our unwavering support for Israel, just wish we could be a more honest broker. It would be much better for our national interest and international prestige.