Israel was historically irrelevant, and in modern times its only significance on the world stage is as a point of contention between more important powers - making Jerusalem's representation as a city-state an almost perfect fit.
Exactly. I don't think ancient Israel was very relevant in history either. When you look at it, it's not a very glorious one. They essentially kept being enslaved and conquered by more powerful nations. As for modern Israel... it's just way too controversial. Not to mention it exists only since a few decades.
I don't understand the parts of this thread regarding controversy. I mean, being able to play as the slave-owning Confederate South isn't controversial? And it's not like all Civ leaders were ideal figures of leadership. I mean Genghis Khan or Attila the Hun certainly won't "good" guys.
There is no problem having the Mongols and Genghis Khan in the game since... well they basically created the biggest empire in history but more than anything it was centuries ago. That's the thing. Today, very few people care whether Genghis Khan was a bloodthirsty criminal or not. On the other hand if you start fiddling with adding countries like say Serbia, Kosovo, Georgia, Israel, Tibet... you are bound to have passions running high and some pretty bad blood from players.