yaniv_illouz,
WAS 8.5 only supports JDK 1.6.
To add support for JDK 1.7, you should install JDK 1.7 in java folder of WAS installation. Make sure the WAS installation is using the JDK 1.7.
You might check the same with these steps :
Start the server, open admin console and set the 1.7 SDK as default(Server > WebSphere application servers > server > Server Infrastructure > Java SDKs > select the 1.7 version, save, apply and restart server)
Once verified you need to manually change the location of “Websphere 8.5 JDK” under Window/ Prefs/Java/Installed JREs to point to WAS 8.5 Java 1.7 JDK. By default it points to Java 1.6 JDK. Restart the IDE and see if you can get it working.
Let us know how it works for you.