Dan Raviv and Yossi Melman argue that the Israelis saw the American flag
on the ship but nevertheless the Israelis did not knowingly attack an
American ship:

    Nearly a quarter of a century [after the attack] neither
      the United States nor the Israeli government provided a
      coherent explanation and left the way open for rumors,
      speculation and natural anger felt by many U.S. Navy
      veterans....When they saw the U.S. flag, the Israelis
      thought it was probably the Egyptians pretending to be
      Americans and did not bother to check.