From my perspective, this is the latest iteration of the problem that Israel has no strategy for how to deal with the Palestinian issue. Or rather, the strategy is to wish that the problem would magically go away.
The result is that Israel perpetually responds reactively. This, in turn, make it easy for Israel to be manipulated into a situation like this.
Yes, everything Israeli media is saying is true. It was a blockade. This group ran a blockade. Probably true that they assaulted the troops when the troops tried to board, precisely to provoke this kind of provocation.
And it worked. The Israeli's responded in a predictable manner, allowing their enemies to dictate the outcome. Complaining about how unfair it is that your enemy's strategy worked was also the predictable outcome.
The diplomatic fallout on this is going to be horrendous. And it caps a string of bad diplomatic news. It is likely that Israel's relationship with Turkey and the EU generally will hit new lows, cutting off valuable trade and tourism opportunities.
If Israel wants to employ what I will call the "Cartman strategy" ("Screw you! I do what I want! You will respect my authoritah!") then it can expect to live with the consequences. But it doesn't even want to do that. It wants regular diplomatic relations with the developed world, a functioning economy, and all sorts of good stuff. It also wants the world to treat it the same way they treat China over Nepal. But that isn't ever going to happen, and wishing it would is not a strategy.
The last Israeli leader with an actual strategy was Sharon, and the strategy worked pretty well for awhile. It restored Israel's connections with the rest of the world, revived the Israeli economy, and shattered the Palestinians into warring factions. Had his strategy been followed, "Palestine" would now consist of two dysfunctional territories utterly unable to sustain themselves economically and generally ignored by the rest of the world. While one may not think this is a particularly humane strategy (hint: it's not), it was at least a strategy,with clearly defined and achievable goals.
Please note I don't pretend that there is a good strategy at this point. The Sharon strategy is not going to work anymore because public perception has shifted again to be sympathetic to the Palestinian Authority.
At this point, I think Israel needs to eat some crow. But should do so in exchange for getting some sanctions lifted. Work with Egypt to lift the blockade on Gaza in exchange for Turkey and Egypt restoring normal relationships. Meanwhile, embrace the PA in the West Bank. Grovel at the U.S. to set final status talks, and generally get all meek and apologetic. All the while promoting the meme that what was effective was non-violent protest. In western eyes, this will put pressure on Hamas to release Shallit to promote further good will.
Happily, Israel's opponents are also fairly predictable in the following way. 1) Hamas will not release Shallit for anything short of total prisoner exchange, which isn't going to happen. It also looks unreasonable to most folks in the simplistic way this is weighed in the world. 2) Someone will press military action against Israel in response to diplomatic movement forward, which will provide Israel with the excuse to stop making concessions. Bad luck for the civilians so sacrificed, but there it is.
Again, I'm not going to pretend that any of this is nice or fair or even morally justifiable. The question is a pure reality question. Diplomatically, Israel needs to do something to break the current logjam, or economic and political sanctions are going to continue to get worse and Israel will be forced into even more humbling terms. Israel needs to take control of the narrative again, as it did in 2005, and figure out a longer-term strategy that can enhance its long term viability while giving up as little as possible. Otherwise, it needs to figure out how to survive another round of Pariah status -- without the backing of a very favorable U.S. government that it had in the Bush years. The only route I see to that in the short term is to take some lumps, grovel some, and look for the opportunity to seize the moral high ground.