There are two issues here. If your flight had been LHR-TLV, BA would unambiguously be in breach of 261/2004. For all cancelled flights from an EU airport, the airline is required to pay for a hotel room if the cancellation causes the passenger to be stuck overnight, and if the reason for the cancellation is lack of crew, then that is not exceptional circumstances and so it should pay compensation (EUR600 for a flight of this length). BA should also be arranging the hotel room themselves rather than leaving the passenger to do it.
However, since the flight is TLV-LHR, the situation is not so clear. The Regulation itself is unclear about how it applies to flights
to the EU, as opposed to from it or within it. The problem is with Article 3(1)(b), which states:
1. This Regulation shall apply... (b) to passengers departing from an airport located in a third country to an airport situated in the territory of a Member State to which the Treaty applies, unless they received benefits or compensation and were given assistance in that third country, if the operating air carrier of the flight concerned is a Community carrier.
The problem is this says "unless they received benefits or compensation". It does not state what benefits or compensation you have to receive from the airline for it to be in compliance with the Regulation. Theoretically, BA could give you a cup of tea, claim that this is a benefit under article 3(1)(b), and therefore claim they have no other obligation. It would be up to a court to determine whether that was good enough, and as far as I am aware, no court with the authority to set a precedent has ruled on this to date.
There is a more detailed discussion of this issue in the following report on the Regulation which was done on behalf of the European Commission (see for example page 74):
http://ec.europa.eu/transport/air_po..._report_en.pdf