ISRAEL At 40: the Dream Confronts Palestinian Fury

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national-unity government of Prime Minister Yitzhak Shamir, leader of the right-wing Likud bloc, and Foreign Minister Shimon Peres, head of the Labor Party, is divided over nearly every major decision. Craven leaders, afraid to offend any large minority, conduct government by near paralysis. The present policy on the occupied territories rests on the hope that the civil order will eventually be restored and that the territories will return to the ''status quo,'' the endlessly uneasy but preferred state of affairs in a nation whose front door opens onto the abyss. For 21 years, Israel's leaders have been telling the people that they were ''practically at peace.'' Why rush to negotiate some traumatizing political compromise? Now Shamir's government says Israel cannot negotiate as long as there is trouble in the territories, an argument that would suggest postponing negotiations until three or four weeks after the Last Day. An election scheduled for November may be among the most critical in Israel's history, but it is unlikely to give any candidate a mandate. ''I am afraid we are going nowhere,'' says Meron Benvenisti, head of the West Bank Data Base Project. ''More of the same. You will be asking the same question ((about the territories)) on our 50th anniversary.'' Paradoxically, Israel's moral territory has contracted as its physical space has expanded. Israelis must consider the dangers of the authoritarian temptation. Israel cannot be a ''light unto the nations'' if it must exhaust itself daily by beating Arabs into submission. The Israeli Arab writer Attalah Mansour describes the Israelis' predicament with an Oriental image: ''Instead of stepping on the snake that threatened them, they swallowed it. Now they have to live with it, or die from it.'' Once when the columnist Stewart Alsop wrote that the Israelis have a ''Masada complex,'' a besieged mentality, preferring collective suicide to surrender, Prime Minister Golda Meir replied, ''It is true. We do have a Masada complex. We have a pogrom complex. We have a Hitler complex.'' Yehoshafat Harkabi, once the chief of Israeli military intelligence and now a professor of international relations at the Hebrew University, has one of the clearer minds in the Middle East. He sits in his study at dusk, on Bar Kokhba, a street in Jerusalem named for the leader of a catastrophic Jewish rebellion against the Romans in A.D. 132, an uprising that left half a million Jews dead and the people of Israel scattered to the corners of the earth. Bar Kokhba is an important and ominous presence in Harkabi's mind. He has written a history of the revolt called The Bar Kokhba Syndrome, and in it stated a warning against national projects that have about them an aspect of grandiose self-destruction. ''Our choice,'' he says, ''is not between good and bad. That is easy. Our choice is between bad and worse. Israel cannot defend itself if half its population is the enemy. The Arabs understand that if there is no settlement, then there will be hell, for them and for us.'' This is the real danger, Harkabi believes: ''If an individual claims that he can live only provided that he sits on the shoulders of another individual, and further that he has the right to drive his fingernails into the other's body (that is, in this instance by establishing settlements), people will begin to question whether it might be better if such an individual did not exist. Never before has Israel prejudiced its claim to legitimacy as