Hint: It's not because Israel is afraid of Iran actually using it. Israel has iron-clad second strike capability (submarines) and any terrorist attack with a nuke by Hezbollah will be assumed to come from Iran.

Ariel Roth's analysis in Foreign Affairs on this subject is sharp and incisive. Money quote(s):

“Essential to inducing that sense of despair [of the Persian Bomb] is Israel’s ability to continuously trounce its enemies on the battlefield and suffer far fewer losses than it inflicts. The Iranian nuclear program threatens Israel’s ability to do this in two ways. First, an Iranian nuclear capability would likely force Israel to restrain itself due to fears that Iran’s nuclear weapons could provide an implied security guarantee to other anti-Zionist forces -- the sort of guarantee that would prevent Israel from causing the massive losses it has in the past, while giving anti-Israel forces the confidence to keep up the fight."

"The even greater threat posed by Iran’s nuclear program is its potential to unleash a cascade of proliferation in the Middle East, beginning with Egypt and Saudi Arabia. For both of these states, the idea that Jews and Persians could have a monopoly on nuclear weapons in a region demographically and culturally dominated by Arabs is shameful.”