Is it legal for a neighbor to smoke outside his/her window?

Your neighbors are right. The law does support them. You can't prevent them from smoking outside their window just as you can't prevent them from cooking meals because the smell of the food is not to your taste. True, there are laws and regulations in Israel that deals with smell nuisance, but they mainly refer to "unreasonable" odors, usually in industrial or health & safety contexts. These laws are meant to deal with pollution, health hazards and so on, not with cigarettes smoke.

Moreover, I don't think that any court will define cigarettes smells as "unreasonable" in the context you described.

For smoking there is a different law, that sets limitation only on smoking in public places such as hospitals, restaurants, theaters, offices, etc., and not in one's home or just in the street or an open place. I believe that a person's window is, by definition, the link between his private home and the street, so there is no way to legally prevent him from smoking there.

As a non-smoker myself, I'm sorry to say your hands are pretty much tied. 

So is smoke from cars. And yet, you don't prevent cars from passing near your house. Because smoking is legal, there's nothing you can do. If your neighbors don't want to show some consideration, you can't force them. Neither can the other neighbors.

There's no relevance to the question of pin-pointing a specific "polluter", be it a smoking car or a smoking neighbor. If the law wished to prevent cars' smoke, it would prohibit cars from driving in residential areas.

Another point is that there are quite a few homes that suffer from cars' smoke, even in the 1st and 2nd floors, and obviously on ground floors and in rural areas.

Since I'm a lawyer, I can tell you that there is a legal difference between cigarettes' smoke and industrial smoke: The first kind is regarded as a private matter that the law doesn't deal with as long as one doesn't smoke in places designated by law as "non-smoking places". In that respect, cigarettes' smoke is the perfect legal equivalent of smelly dishes (There's no point in repeating the "toxic/non-toxic" claim. I'm not giving you my opinion, I'm giving you the law's opinion). You could argue that the definition of "non-smoking places" should be expanded, but till that happens the law is against you. Write to your Knesset Member.

Cars' smoke, on the other hand, is regarded as a "necessary evil" of the modern world, and the law focuses on reducing it (and other sources of industrial pollution) to a level on which it could be said "well, it is bad, but it's worth the trouble". So, there is a way to stop all the car pollution, but that means going back to horses and carriages. The law believes that this is an unreasonable solution, and so is preventing people from standing at the window of their own home and smoking.

Yeah - they're right. Accordign to Israeli law, one can smoke at home.