Is it defamatory to call someone Palestinian?

Last week, Fairfax journo Mike Carlton resigned after firing up against critics of his article about Israeli attacks on Gaza.

News was quick to pick up on the story, giving it a two page spread in the Daily Telegraph. The punch line was a bizarrely photoshopped picture with Carlton's face super-imposed on a bombing victim and wearing a Palestinian head-dress. The body was actually that of a Boston Bombing victim. Oops.

Leaving aside the obvious questions of journalistic integrity and disgusting tackiness, there's an interesting legal issue here about defamation by photoshop. After a string of steamy cases about unauthorised publication of people's private parts, we know that a photograph can be defamatory. The question is whether it will cause people to think less of you. Words can hurt, and so can an image.