The present Israeli government is committed for historical and security reasons to hold on to the occupied West Bank and Gaza Strip. If Israel ultimately annexes the two territories and gives the 1.3 million Palestinians of those territories citizenship - as Defense Minister Moshe Arens recently suggested - Israel could become a binational Jewish-Arab state.
If, on the other hand, citizenship is denied, or the Palestinians refuse to take it, Israel would face the task of permanently controlling a hostile minority and the risk of undermining its own democratic institutions.
The Israeli government does not view the occupied territories in these terms. Prime Minister Menachem Begin has always regarded the West Bank and Gaza as an integral part of Eretz Israel (Hebrew for the Land of Israel), to which Israel has unquestioned and ''eternal'' rights.
Last year, Mr. Begin declared, ''Western Eretz Israel will never be divided again.'' The word ''western'' referred to his conviction that the Jewish people also have unexercised historical rights to the east bank of the Jordan River, currently the Hashemite Kingdom of Jordan.
But keeping the occupied territories confronts Israel with the problem of how permanently to control a disenfranchised Palestinian population. Prime Minister Begin's government until recently has supported the concept of a very limited administrative self-rule over day-to-day life for West Bank/Gaza Arab residents but not allowing Palestinians control of occupied land.
This was the Israeli definition of ''autonomy,'' a five-year transition period of Palestinian self-rule called for by the Camp David peace accords. Israeli government guidelines stated bluntly that such ''autonomy'' ruled out Palestinian self-determination or sovereignty at the end of a five-year transition period.
Government officials say frequently that Palestinians must satisfy their national aspirations in Jordan, where they are the majority but don't control the regime. But negotiations on autonomy died when both Jordan and West Bank/Gaza Palestinians refused to join because they were not guaranteed in advance that Palestinian self-determination would be the final outcome.
Defense Minister Arens, an outspoken hawk with little previous experience with the occupied territories, surprised political analysts here when he called for annexation and citizenship for Palestinians in a recent interview in the Los Angeles Times. Prime Minister Begin's original autonomy plan also offered West Bankers and Gazans a chance to become Israeli citizens, a point that seemed to have been quietly dropped.
Some Israelis question whether Mr. Arens's suggestion was serious or is further evidence of his acute sensitivity to US public opinion. In fact, observers doubt whether Palestinians would take up the offer. They point to the case of east Jerusalem, which Israel annexed in 1967. According to Jerusalem Mayor Teddy Kollek's adviser on Arab affairs, Maurice Zilka, over the past 16 years only ''about 50'' out of a population of 110,000 east Jerusalem Palestinians have obtained Israeli passports.
However, some West Bank Jewish settlers who oppose offering citizenship to Palestinians are worried that Gazans - most of whom are stateless - might be more willing to accept passports than West Bankers and east Jerusalem residents who are Jordanian citizens.
Should the Palestinians grasp at citizenship, Labor Party shadow foreign minister Abba Eban predicts they ''would virtually take command of the Israeli political system.'' Mr. Eban says that, even if the percentage of Palestinians in Eretz Israel rose no higher than the current 35 percent, annexation would give them ''the controlling balance in Israel's institutions.'' Palestinians could then demand their place in a majority coalition and legitimately seek access to security matters.
''This would fulfill Yasser Arafat's dream of making Israel a binational state,'' says lawyer Tsaly Reshef, a leader of the peace movement that supports Palestinian self-determination under conditions of peace. ''It would lead to the 'Lebanization' of Israel,'' he adds, evoking the familiar image of violent ethnic clashes within Israel's northern neighbor.
Annexation followed by the offer of citizenship is also advocated by Israel's most right-wing party, Tehiya (Renaissance).
Tehiya member Prof. Yuval Neeman holds a Cabinet seat and is acting head of the ministerial committee on settlement. But Tehiya leader and parliament member Hannan Porat does not hide his belief that most Palestinians would refuse the attached conditions.
Tehiya would require Palestinians to do three years of national service, largely in their own sector (parallel to Israeli Army service) and to pay Israeli taxes.
What if the new Palestinian-Israeli citizens formed a coalition that called for the return of the West Bank?
Mr. Porat bristles. He was one of the founders of Kfar Etzion in 1967, one of the first Jewish West Bank settlements. Kfar Etzion is on the site of the pre- 1948 settlement where he was born and where he barely escaped an Arab massacre with his parents. He says firmly, ''Citizenship would only be granted after Judea and Samaria (biblical names for the West Bank) had become an integral part of Israel. This could not be reversed.''
What if the Arabs should found their own political party calling for a Palestinian state?
''The Knesset (parliament) couldn't have a party which stood against Zionism, '' he responds.
And if the Arabs refused citizenship under such limitations?
''That's their problem,'' Porat says.
He would then offer them the category of ''resident'' with ''all human rights except the right to vote or be elected to the Knesset.'' Porat believes that if Israel annexes the territories, makes it plain they are forever an integral part of Israel, and clearly rules out hope of either a Palestinian state or autonomy, then ''the large majority of (Palestinian) Arabs will choose to be part of Israel - as 'residents.' A (Palestinian) man who knows where he stands will be more compliant,'' he says.
Many observers doubt the government will opt for annexation, with the international furor it would bring. They say that Israel will choose instead to maintain the current policy of permanent impermanence.
''The government believes the status quo is working, so why change it,'' comments Tsaly Reshef. ''They believe the Arabs will have to accept it or leave.''
How realistic are the prospects for long-term ''coexistence'' with a large Palestinian minority denied political rights?
During the last few weeks, Israeli authorities have been experimenting with a new formula of governance on the West Bank to facilitate ''coexistence'' under the status quo, for the foreseeable future at least. The newly named coordinator for Judea, Samaria, and the Gaza district, the tough and experienced Gen. Eliahu Ben Elizer, told an Israeli journalist, ''I would say right now I have a common language with all sides. The time comes to try and understand each other.''
In practical terms, this means Israeli officials are feeling out well-established, pro-Jordanian notables on the West Bank to take over the running of several West Bank Arab municipalities where Israel had ousted elected pro-PLO mayors and replaced them with Israeli officials. They believe the desperation of West Bankers combined with the disarray of the PLO has created interest in Palestinian circles that previously would have quickly declined such offers.
Whether such a move will succeed or can ensure long-term calm is another matter. It comes after a succession of Israeli occupation strategies, each of which has been junked in its turn. At various times the Israelis have favored pro-Jordanians or facilitated the rise of pro-PLO men by holding free elections. They have more recently pushed both categories aside, focusing instead on Israeli-backed, armed, and funded village leagues. Now even the village leagues policy appears to have been officially discredited.
''The new moves will just start the cycle over again,'' predicts an Israeli journalist who covers the West Bank.
Also uncertain is how strong a Palestinian resistance will be provoked by indefinite occupation. Despite Arab stone throwing at Israeli vehicles, and a very occasional murder of an Israeli by Palestinians, Israeli hawks in private often express gratification over what they consider the remarkably low level of violent resistance over the last 16 years. This has been variously attributed by experts to excellent Israeli intelligence, weak organizational links between the PLO and the West Bank, tough Israeli tactics when necessary, and the conservative West Bank society, riddled with clan rivalries.
But many Israeli hawks are convinced that Palestinian ties to the West Bank are tenuous and can be broken. ''The Arabs have chosen material welfare over national struggle in Judea and Samaria,'' contends hawkish West Bank expert Prof. Mordechai Nissan of Hebrew University. He is referring to the tens of thousands of Palestinians who work peacefully at jobs in Israel and on construction of Israeli settlements on the West Bank.
Settler leader Benny Katsover talks of the increasing sales of West Bank land by Palestinians to Jews for use in settlements since the war in Lebanon. The increase has come despite the Jordanian policy of imposing the death penalty for such sales. Mr. Katsover says that ''$200 million will solve the problem and will spur the Arabs to relinquish the biblical regions of the country and migrate to other countries.''
On the other hand, Israeli analysts like former head of military intelligence Prof. Yehoshafat Harkavi say that Israeli settlement policy is ''self-contradictory'' because massive settlements will alienate the Arab population and radicalize Palestinians who stay.
Even Professor Nissan believes that ''in the long run the Jews who believe the Arabs will be quiet are fooling themselves. It is unlikely that the level of violence will remain the same,'' especially if economic conditions in Israel get worse. It is this prospect that worries many Israelis today.
The daily Haaretz editorialized recently, ''The necessity to maintain long-standing military rule over a population which does not desire Israel's presence will increase and intensify the brutalization of public life in Israel. . . .''
''I don't know if I could stay here if Israel keeps the West Bank,'' an Israeli-born academic says reluctantly at a party. Echoing another theme heard here more frequently, a colleague at the gathering says of his 10-year-old son, ''I don't want them to send him to police the West Bank when he goes to the Army in eight years.''
The debate over how to rule the Arabs has in fact broadened into fierce arguments over the future prospects of Israeli democracy and the legitimate goals of contemporary Zionism or Jewish nationalism.
For most Israeli hawks there is no contradiction between Jewish rule over disenfranchised Arabs and democracy. Nor is it the most pressing issue. Israeli redemption of the whole land of Israel is seen by settler leaders as the key mission of the Jewish state.
''If a Palestinian wants to live under Arab rule, then he has to leave (the West Bank) for the Arab world,'' says Porat. ''Israel can help by buying their land or giving them economic assistance to leave.'' He adds that he ''does not feel it would be acceptable that Arabs would be expelled. But this could happen if there were a war.''
At the extreme right, Rabbi Meir Kahane, the American-born leader of the tiny , violence-prone Kach (''Thus'' in Hebrew) movement is more blunt. He insists that Israeli Jews, ''like it or not,'' must choose unswerving adherence to a Jewish state, or the democracy of the Western liberal world which gives the Arabs the right to change the country into an Arab state.
In his book ''They Must Go,'' Rabbi Kahane says that Palestinians should be offered the choice of accepting absolute Jewish rule with no political rights or voluntary transfer with compensation to another country. Those who refuse either option, he says, should be expelled forcibly without compensation.
Rabbi Kahane, who holds both US and Israeli citizenship, is referred to as ''a crazy'' even by right-wing settlers and has been detained briefly by police several times for incitement. But the government has refused opposition demands that he be deported.
It is to forestall the choice between democracy and maintaining a Jewish state that Israeli opposition groups want to divest their country of all or part of West Bank-Gaza land.
The Israeli government appears unperturbed by pessimistic scenarios about the price of occupation. Defense Minister Arens told the newspaper Davar recently, ''Objectively, the situation of the Arab population in Judea and Samaria is better then it was in 1967 in all respects, and I would be surprised if there is an Arab in Judea and Samaria who would say otherwise.''
Other articles in this series appeared Aug. 15, 16, 17, and 18.