It may seem quirky to pick a busy street corner as your favourite place in a city, but this is no ordinary corner. With your back to the sea, look up the length of the wide Ben Gurion Avenue from its intersection with Ha'atzmaut and wonder at the most beguiling sight in Haifa, Israel's mellowest city: the manicured park, stretching up the Carmel hillside, and the golden domed shrine that is one of the two holiest places in the Baha'i faith. But that's not all there is to this corner, which is not just a junction between two streets, but between east and west, past and future, Jew and Arab.

Dominating Ha'atzmaut to the left is the fortress-like Dagon Grain silo. Built in 1953, it is so massive it cuts off the view of the sea from parts of inner east Haifa, including some of the picturesque Christian-Arab quarter of Wadi Nisnas, in whose narrow streets during August 2006 I took shelter in a gambling den from Hizbollah's Katyusha rockets. Behind the silo is the port itself, today a major entry point for cargo imports, but also, after the Second World War, the destination for Jewish immigrants, European Holocaust survivors, seeking to defy the British blockade on Mandate Palestine. Two kilometres west of here is the impressive Clandestine Immigration and Navy Museum, dominated by the hulk of the ship Nevertheless, intercepted in 1947 by the British, its 434 refugee passengers deported to internment camps in Cyprus.

Long an important Middle East trading post, and now a hi-tech centre, Haifa is a delight to visit. Its sandy beaches, overlooked by the wooded Mount Carmel, are among the best in Israel. What makes it so unusual, however, is the vein of history, some of it ineffably sad, some tinged with what may just be a sliver of hope for the future. The sadness is captured in the Palestinian writer Ghassan Kanafani's famous story "Returning to Haifa", which describes how a couple, among the thousands of Palestinian refugees who fled the city in panic as it passed overnight from British to Jewish control in April 1948, travel from the West Bank to revisit their old home 19 years later. The twist is that the house is now in the hands of Jewish Holocaust survivors along with the infant son they left behind, now a soldier in the Israeli Army. What makes it remarkable is the sensitivity with which Kanafani treats not just the Palestinian agony, but that of Jews at the hands of the Nazis.

Relations in Haifa between Jews and Arabs – while not problem-free – are probably the most harmonious of any city in Israel. Two kilometres north-west of this road junction, high on the hill, is another Haifa favourite: the Stella Maris Carmelite monastery with its breathtaking views across the city and the Mediterranean. On a Friday in January, at Kalamaris, an excellent Arab restaurant across the road, Jewish and Arab families randomly distributed among the tables were eating a leisurely late lunch as dusk fell. The largest group was a mixed one of good-humoured students, celebrating the end of a course. When the Arab manager told the group, in Hebrew, what was on offer, one of the students – an Arab but clearly a fluent Hebrew speaker – briefly replied to the waiter in Arabic. "What, you don't understand his Hebrew?" a Jewish fellow student teased him. Everyone laughed. For a moment you had a glimpse of what this country could be.

Donald Macintyre is Jerusalem correspondent of The Independent