Now, thanks to its balmy climate, vibrant nightlife and a creative government-backed branding campaign, the city has become one of the world's top gay tourist destinations.
As always in the Middle East, however, conflict is never far away, and some critics have accused Israel of using such tolerance as a way to divert attention from alleged transgressions against Palestinians.
Tel Aviv devotes about $US100,000 ($A95,753) - more than a third of its international marketing budget - to drawing gay tourists. Though no exact figures exist, officials estimate that tens of thousands of gay tourists from abroad arrive annually.
"We are trying to create a model for openness, pluralism, tolerance,'' Tel Aviv Mayor Ron Huldai told The Associated Press.
"Live and let live - this is the city of Tel Aviv.''
The city's first openly gay-owned hotel was opened recently and numerous city-backed travel sites direct gay visitors to the hottest clubs, bars and resorts in town.
"We've long recognised the economic potential of the gay community. The gay tourist is a quality tourist, who spends money and sets trends,'' said Pini Shani, a Tourism Ministry official who has been involved in the campaign.
"There's also no doubt that a tourist who's had a positive experience here is of PR value. If he leaves satisfied, he becomes an Israeli ambassador of good will.''
That's exactly what Israel's opponents fear. They derisively call the embrace of gay culture "pinkwashing'' - a conscious attempt to play down what they call violations of Palestinian human rights by Israel behind an image of tolerance.
Human rights groups accuse Israel of various violations against Palestinians, such as arresting minors, demolishing Palestinian homes built without permits, seizing Palestinian land in the West Bank, detaining Palestinians for months without charge, and failing to prosecute soldiers for wrongdoing in Palestinian areas. Israel says it respects human rights and that its practices in the Palestinian areas are solely due to security concerns.
Tel Aviv has in fact become a haven for homosexual Palestinians, who can face ostracism or persecution at home in the West Bank, as well as ultra-Orthodox Jews, who escaped their repressive homes for the freedom of the big city.
Behind its image of a society struggling with religious coercion and the constant threat of war, Israel is one of the world's most progressive countries in terms of gay rights.
Gays serve openly in Israel's military and parliament, and the Supreme Court has granted gays a variety of family rights such as inheritance and survivors' benefits.
Israel is the first country to feature a same-sex duo on its version of the television competition Dancing with the Stars and gays, lesbians and even a transsexual are among the country's most popular musicians and actors.
Tel Aviv holds a festive annual gay parade, rainbow flags are often seen flying from apartment windows and it has a community centre for gays.
The city was recently recognised by readers of the travel website GayCities and American Airlines customers as "Best Gay City of 2011,'' ahead of New York, Toronto and London. The competition said the "gay capital of the Middle East is exotic and welcoming with a Mediterranean c'est-la-vie attitude.''
Dennis Muller, a 22-year-old tourist from Berlin, agreed.
"You enter Tel Aviv and you are in the gay dream,'' Muller said on a recent weeknight inside the packed Dreck nightclub.
"It's like entering a bubble of peace for homosexuals or LGBT people in the Middle East.''
Omer Gershon, 40, a veteran of the Tel Aviv gay club scene, said tourists are drawn to the city's "crazy'' night life.
"The need for escapism is very high, so people go out every night to celebrate life,'' he said, adding that tourists find Israeli men "very exotic.''
Tel Aviv's atmosphere is so liberal that certain clubs now refer to themselves as being "straight-friendly,'' said Leon Avigad, who owns Brown, an urban boutique hotel that caters to international guests.
"Tel Aviv is so gay that you don't need to declare yourself as a gay institution in order to attract gays,'' said Avigad, 40, who is married to a man and has a young daughter.
"The Western world loves this mixture of Eastern warmth and the urban life of a big metropolis and the Western finesse and fine things in life.''
He said he's not concerned with the country's precarious politics.
"Because Israel is doing things that I personally may not agree with does not mean that it cannot be very interesting as a gay destination for foreign travellers. It just adds to the spice,'' he said.