Once upon a time, there was a place where Jews and Arabs would regularly meet, drink, dance and flirt, without even a hint of political tension. No, this wasn’t some halcyon era in 19th-century Palestine, nor a cosmopolitan watering hole on the neutral territory of a European capital, but a place that existed not so long ago and right at the heart of the Israeli-Palestinian conflict.

It was the Shushan, the only gay bar in Jerusalem and, in its day, quite possibly the only Jewish-owned space in all of Israel where Palestinians who had crossed the Green Line illegally could socialise and feel (more or less) safe.

I was reminded of it this month by the news that gay Palestinians seeking asylum from persecution at home can now get work permits in Israel. This, to be clear, is hardly a grand humanitarian gesture. Only the 90 or so people to whom Israel has already granted temporary residency are eligible for work permits so they can earn a living instead of being destitute and dependent on the state while they wait, sometimes for years, for another country to take them in. In at least some cases, Israel itself is directly responsible for their plight; its security services have long used blackmail to pressure queer Palestinians into being informants, and if their collaboration is discovered, their sexuality often is too.

The Shushan, which opened in 2003 and closed in 2007, was a relic of a slightly more forgiving time — not because Israel was any more welcoming to Palestinians, but because it hadn’t yet finished building the separation barrier that kept them out.

The bar was on a seedy, cobbled side-street just a couple of minutes’ walk from the looming fortifications of the Old City, tucked in among decrepit workshops and low-rent housing. The dimly lit, rainbow-coloured sign above the door brought to mind one of the grungy cafés inhabited by young Israelis just returned from backpacking in Asia.

The space inside was equally unprepossessing. A long, U-shaped bar serving watery drinks took up the front half. The other half was a dancefloor that would hold two cars, or maybe three if you parked them close enough. The two side walls were mirrored in a feeble attempt to make the place seem bigger. At the very back, a large wooden box served as a stage. Colourful disco lighting masked the fact that there was no other décor to speak of. There were two toilets; one was always blocked, the other always had a broken lightbulb, and neither had a door that latched.

On my first visit, as it sank in that this dump constituted the entire gay scene of the city I’d committed to spending several years of my life in as a foreign correspondent, I turned to the friend who had brought me. “Is this it?” I asked. His eyes flared with a mixture of sympathy and Schadenfreude. “Yep,” he said, with just a little too much relish, “This is what there is.”

The crowd at the Shushan, however, was as eclectic as the interior was bland. Since Jewish Israelis in their 20s and 30s tended to abandon Jerusalem for the more queer-friendly nightlife of Tel Aviv, the bar’s Jewish denizens were a mix of the very young — soldiers and college students — and considerably older, from university lecturers to working-class men from the poorer suburbs, plus the occasional frock-coated charedi who had sneaked in from the nearby neighbourhood of Me’a Sha’arim.

There were a few Palestinians from the Old City and East Jerusalem, who have Israeli residency cards, and a smattering of the foreign diplomats, journalists and aid workers who typically use the city as their base. And then there were the illegals — a posse of young men from Ramallah who would slip through one of the unfinished sections of the separation barrier to perform in drag in enemy territory.

I had met one of them, a tall, willowy 20-year-old named Boody, at a gym in Ramallah. A few weeks later he teetered on to the tiny stage of the Shushan in a miniskirt, spangled top and heels that added several inches to his already lanky stature. A wig, mussed and slightly askew, completed the look. He danced sideways-on with his head turned to the audience and one shoulder coquettishly raised, lip-synching out of time with the music and fluttering his inch-long fake eyelashes.

It was possibly the worst drag performance I had ever seen, but it didn’t matter; somehow this kid had found a way to sneak across the checkpoints into Israel, put on women’s clothes and twirl on stage in front of a cheering, whistling roomful of Jews and Arabs. If the Israeli police caught him, he faced months in jail; if his family caught him, he might face something worse. The awful drag show was also an act of sheer, joyous defiance against the strictures of both Israeli and Palestinian society.

As was the Shushan itself. On its best nights, as the alcohol flowed and the music veered drunkenly from Western to Arabic to Israeli pop and back again, the raucous atmosphere evoked Weimar-era Berlin. People clumped together in threes and fours and gyrated like entangled dragonflies. Jews tried to imitate the hip-jiggling and wrist-twisting of the Palestinian boys, who were themselves doing a parody of the dances traditionally performed by Arab women.

One night, when a handful of adventurous straight couples had wandered in to witness the strange vaudeville, I watched a tousle-haired Jewish student let himself be reeled into a close-quarters shimmy by an effeminate Palestinian who rubbed up against him, pretended to grab his crotch, brought a hand to his own mouth in mock alarm, returned to the dance with a frenzy and finally handed the boy back to his amused girlfriend with a sweeping bow.

During my years in Jerusalem, the Shushan became the closest thing to my local and Boody and his crew became friends. I visited them in Ramallah and saw them at nightclubs in Tel Aviv; Boody, his act now slightly more polished, started to develop a minor cult following in the Israeli underground nightlife scene, and even did a few paid gigs. They shared stories of close shaves with both the Palestinian and the Israeli authorities — like the time the police had arrested two members of the gang in West Jerusalem. After one of them, Ramzy, pulled a wig, dress and heels out of his bag and told them he’d come to perform at the Shushan, the astonished cops drove them to the Ramallah checkpoint instead of the city jail and warned them never to come back. “And after two more days I came again to Jerusalem,” Ramzy proudly told me.

Yet the drip-drip exodus of secular Jews from Jerusalem, the gradual closing of the remaining gaps in the separation barrier and the owners’ financial problems meant the Shushan’s days were numbered. Its closing party was a subdued affair, tinged with nostalgia but also with apathy. The Jewish drag queens had their gigs in Tel Aviv, several of the Ramallah boys had gone abroad after getting threats at home, and the rest of the clientele were either young people looking to get out of Jerusalem themselves or the older ones who had seen it all come and go and couldn’t care much either way.

For a while, there was no gay bar in Jerusalem. Today there is the Video Pub and it too is said to be a spot where Jews, Christians and Muslims all come together. I haven’t been, but I know that crossing illegally from the West Bank into Israel is now much harder. And without those illicit visitors, I doubt it has that magical quality the Shushan had: of a place where, for a few hours a night, there was no Israel, no Palestine, no barriers, no social mores — just bad music, weak drinks, broken toilets, and people having the time of their lives.

Gideon Lichfield is the global editorial director of WIRED and was the Economist’s Jerusalem correspondent