Because it takes part in (and occasionally wins) the Eurovision song contest.
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By that logic, Australia is European, too :-)
Though I don't think they've won yet.
Realistically, the main reason that Israel is often counted with Europe is probably that they don't get along well with their neighbors. The implications for stuff like sports competitions could be nasty.
> The implications for stuff like sports competitions could be nasty.
After the murder of Israeli athletes by the PLO/Black September at the Munich Olympics, that seems a long way off.
Eurovision-wise the story is a little sad: Lebanon wanted to enter, but since the country forbids broadcasting Israeli content (!) and the EBU refuses to let countries cut the programme, this was impossible. I believe this rule was inspired by a previous incident where an Arab country cut away to a vase of flowers for 3 minutes to avoid broadcasting the Israeli entry.