1) The strategy I proposed last week was based on maintaining ambiguity wrt Israel's military capacity. While Hizbullah would certainly have regarded surviving as a win, the cost to Lebanon and the knowledge that Isreal had limited itself to air power would have prompted "swing voter" equivalents in the region to continue to doubt that Hizbullah (or any other Arab army) could take on Israel in a sustaned ground war.
This has changed. An Israeli cease fire now would be perceived throughout the world as an Israeli admission that it cannot dislodge Hizbullah. That would sway fence sitters such as Egypt to reconsider backing Hizbullah and other proxy-forces in the hope of victory and fear of being excluded from possible victory.
Even now, Hizbullah will enjoy a serious uptick of support in the region as an army that fought Israel succesfully despite Israel's airpower and technological superiority. The only way to limit this is to demonstrate that the cost for Hizbullah was too high, creating a mutually assured destruction (MAD) scenario that dissuades powers for whom the existence of Israel is not their central issue from supporting Hizbullah.
2) The strategy I proposed last week was also based on minimizing diplomatic and economic harm to Israel. At the time, Israel's acceptance of a cease fire could have been leveraged by it and its supporters as evidence of Israeli restraint. Again, that opportunity is gone. Israeli acceptance of a cease fire under terms demanded by Europe and other powers would be viewed as evidence that Israel can be cowed by diplomatic pressure. Nor would it recover ground lost in popular opinion since last week. Instead, it would be regarded by its allies in the U.S. as failure of nerve and regarded by the rest of the world as "too little, too late."
This makes the diplomatic calculus different. To a certain extent, Israel may as well "hang for a sheep as well as for a lamb" and see things through to a better conclusion on its military front since it will already suffer significant diplomatic and economic damage. (The caveat here is if the situation in England threatens the Bair government sufficiently that Blair must withdraw UK support.)
Further, there is value in having the reputation as a state that will sacrfice everything for the sake of its internal security. At this point, Israel's only diplomatic win can be a signal to the rest of the world that it will take any diplomatic or economic damage to preserve its citizens from attack within its borders.
On the other hand, the longer the conflict drags on, the more Israel loses. Unless it drives Hizbullah out of Lebanon soon, and can clearly control the southern region (at least for a time), Hizbullah will be perceived as a winning horse worthy of backing from even moderate states. Pressure will mount to rovde more overt support for both Hizbullah and Hamas, as it will appear to the Arab world that Israel can be defeated militarily and that only the cowardice of its leaders (or their servile status vis-a-vis the U.S.) is holding back a victorious Arab assault that can accomplish with pan-Islamism what could not be accomplished via secular pan-Arabism. Indeed, only the fact that so much territory lies between Israel and Iran has prevented Iran from sending actual troop support.
This places Israel in a profoundly ugly position. It can only intensify operations by either taking fewer precautions against civilian casualties or by calling up more reserves. The later will certainly have significant economic impacts and would be taken as a desperation signal by the Arab world. The former would make it even more difficult for Israel's existing allies to support her.