This interesting essay over at HotAir by Doctor Zero looks at various scenarios under which Iran might wreak havoc as a nuclear power, including this very real problem:

The Nuclear Umbrella: The most logical, and essentially guaranteed, result of a rogue regime achieving nuclear capability is the immediate foreclosure of the Saddam Hussein option. The regime could take all sorts of provocative actions without ever needing to worry about military retaliation

The good Doctor also mentions a nightmare scenario under which the U.S. is nuked, which is a real concern but a fairly remote possibility. However, there is a much more plausible scenario under which Iran could attack and possibly even destroy the state of Israel by fully exploiting its nuclear shield.

Consider the likely American/European reaction to this sequence of events: an Iranian nuclear weapon is set off in Tel Aviv by Hizbollah, and Iran immediately announces it was not the source and furthermore asserts it has nuclear-tipped missiles targeting London, France, and Berlin which it will launch if it considers itself threatened. Days or weeks are required to ascertain the source of the nuclear material, and of course the device itself will be vaporized, leaving no direct fingerprints. Obama and European leaders will frantically demand Israel not retaliate with its own strike, and a nuclear counterattack isn't the sort of thing one can decide to launch after a laborious investigation in any case. In the end, Israel would probably be left with nothing more than the usual impotent UN condemnations and sanctions. Meanwhile, at best Israel's economy will be shattered and much of the relatively affluent Jewish population will have fled, leaving the viability of a Jewish state in doubt.

And the outcome could easily be much worse than that. An atomic attack would also create an EMP effect which could render much of Israel's superior military technology inert. This could open the door to an opportunistic invasion in which Israel would find itself massively outnumbered by hostile forces in a matter of hours (and if you think it's unlikely Palestinians and other Arabs would charge into an irradiated Israel, remember such an act combines the best of two regional traditions - suicide attacks and car swarms). In addition to the gleeful abandon with which Hamas and Hizbollah would attempt to fulfill their long-stated goal, it would not surprise any longtime observer of the region if the IRGC and other regional forces invaded under the pretense of giving aid.

It may be comforting to think the U.S. wouldn't just stand by and let a strategic ally fall, but Obama's ideological forebear Jimmy Carter dithered while the Shah of Iran fell, gifting the world with the Iranian theocrats who will shortly control nuclear weapons. Circumstances could unfold too quickly for measured, thoughtful diplomacy-first, diplomacy-last, diplomacy-always style of the this administration.

This "shield+sword" scenario will become increasingly problematic over time, as other Mideast states will likely follow Iran in becoming nuclear powers. When Saudi Arabia, Syria, and Iran all have nuclear arsenals, Israel will be in the position of not knowing where a retaliatory strike should land. Their only option for deterrence would be to promise a massive counterattack against most of the Muslim capitals and Mecca itself in the event of such an attack. This would fuel enormous resentment and international condemnation, never mind that such a policy would constitute Israel's only real defense against an existential threat.

And if any hostile power should ever doubt Israel's resolve to immediately launch such a reprisal...

After the events of sixty years ago, the civilized world said "Never again." Today, those words are starting to ring hollow as forces are aligning that may allow a repeat of modern history's greatest tragedy.