ISRAEL At 40: the Dream Confronts Palestinian Fury

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author, ''but an exemplary state.'' Israel was born with monumental ambitions and evoked heroic expectations. Israelis are extraordinarily sensitive about their image, in part because of the 2,000 years in which Jews had to worry, for their survival, about the opinions of the Gentiles around them. ''Israelis feel they are a people walking a high ledge,'' says Oz. It is not only fair but necessary to ask if Israel has lost its way. Surrounded by nations that have tried to destroy it in five wars in 40 years, and now engaged in fighting a Palestinian uprising, Israel cannot afford to lose its way. The question of its survival is involved. Arthur Hertzberg, a vice president of the World Jewish Congress, believes something began to go wrong for Israel at the moment of its greatest triumph, the Six-Day War. He argues that while the 1967 victory was splendid for the Jewish ego, in Israel and in the Diaspora, the demonstration of such brilliant power, whatever advantages it brought, eventually led down a path of aggressiveness and grandiosity. After the Six-Day War, Ben-Gurion, then in retirement, warned Israel that it should give back all the captured territories very quickly, ''for holding on to them would distort, and might ultimately destroy, the Jewish state.'' Prime Minister Levi Eshkol offered to return almost all the territories to the Arabs in exchange for recognition and a promise to negotiate peace. But opposition from Israeli hard-liners, including Menachem Begin, then a Cabinet minister, crippled Eshkol's proposals. Meanwhile, the Arab states responded thunderously with their famous ''three noes'' -- no recognition of Israel, no negotiation, no peace. Twenty-one years later, Israel still holds the territories, but no longer so reluctantly. Twenty-one years is long enough to allow a generation of Palestinians to grow to adulthood knowing only, and hating, the occupation. But in a land so old, 21 years is merely an instant. Civilizations are piled on top of one another (Hebrew, Assyrian, Babylonian, Persian, Greek, Hellenistic, Maccabean, Roman, Byzantine, Arab, Egyptian, crusader, Mameluke, Ottoman, on and on), all the laminations that conquerors have left in the earth there -- a rich debris of meanings and promises and desires. The accumulation of passion and memory, so much of it implicated with God, can make the land seem at times both wondrous and psychotic. There are certain parallels between Israel and America -- both nations born with a mission, both ingatherings of people from around the world. In a curious way, part of the genius of America has been a collective forgetfulness, a talent for somehow outdistancing problems in a headlong race toward something new. It is a form of heedlessness, perhaps, blithe and profligate, but also an exuberant forward spin that may spare people the exhausting obligations of revenge. A curse of the Middle East is that almost nothing there is ever forgotten. Part of the difference is physical space: Americans had an enormous continent to flow into, an expanse in which to lose themselves and some of their obsessions. Like the Zionist pioneers, Americans coming to the new land encountered people already in residence, and solved the problem harshly enough. Some Israelis on the far right wish they could settle their dispute with the native Arabs as easily and brutally as the Americans did with the Indians, and without the witness of television. The Israelis have alarmingly little space. For both