THE TRUTH IS Israel has changed drastically. With the occupation of all of Palestine in 1967 and the rise to power of the leaders of the pre-state right-wing Irgun and Stern Gang undergrounds 10 years later, the pioneer era is over. It has been succeeded by discordant values, divisiveness, an economy out of control and a million conquered Arabs. Israel has traded a measure of external safety for internal trouble.

In this brief, fact-studded book, Peter Grose, managing editor of the Council on Foreign Relations' magazine, Foreign Affairs, identifies four major changes that bear on Israel's domestic well-being and external relations with the rest of the world. These perceptions of change will be surprising to those who have not been paying attention.

The first change Grose emphasizes is that Israel has become "a fractious society." He is not referring to the familiar split between the Ashkenazi and Se- phardi Jews -- which he sees as "cultural divisions of the Diaspora (that) are losing their relevance" -- but the clash of rigidly observant and secular Jews between whom "tensions and bitterness (are) growing." He says, "the conflict between the varying demands of religious observance is the most potentially disruptive threat to the unity of Jewish Israel."

Secondly, Grose decries the disastrous, self-indulgent inflation that has "brought the nation to a genuine economic crisis." As a result, 350,000 Israelis (10 percent of the population) have moved to the United States and many others ship their savings out of the country. "Israel is an economic ward of a foreign power, the United States," Grose adds. "The state of the Israeli economy is no longer a purely internal matter to be left to Israeli politicians. It is, to an increasing degree, the United States Treasury and the American taxpayer that underwrite the economic priorities defined in Jerusalem."

Third, he says, "The undeniable reality, not planned and not pleasing to either side, is that the extended Jewish State of Israel is becoming a binational society." But he disagrees that higher Arab birthrates will eventually overwhelm the Jewish state. He points out that between 1967 and 1982, the West Bank birthrate was indeed 4.1 percent, but the actual population growth was only 1.4 percent. "The fact is Arabs are quietly leaving the West Bank." And, "The regime of martial law that has existed since 1967 serves the interests of Jewish Israelis quite well, and the Arab Palestinians under occupations have not yet rallied to challenge this status quo."

Fourth, Israel replaced wars of survival with a war of conquest. Israeli troops "had always believed that when they were sent to the front line, it was to defend Israel's vital interests and survival. That faith was lost in Lebanon. . . .Disillusionment spread to the civilian population." Ariel Sharon's arrogant 1982 invasion of Lebanon (which the United States "unwittingly underwrote" turned adventurism into despair and 600 Israeli dead. It was "a tragic and costly blunder." Grose says, "More than at any other time in their history, Israelis began to question the legitimacy of their government's military judgment. . . .A serious breakdown of civil responsibility had occurred."

NOW, the so-called "unity government" headed by Shimon Peres is trying to escape from Lebanon, bring the economy down to earth and restore Israelis' faith in themselves as a righteous people. It has a lot of sweeping up to do. Peter Grose explains some of the reasons why. His book, the product of a Council on Foreign Relations study group on Israel, is short enough, clear enough and right often enough to offer a reader a quick once-over of the state of Israel today.

But Grose goes a step further. He recommends what Americans should do about this changing Israel. If the United States were to follow Peter Grose's controversial prescriptions, it would:

* Keep the U.S. Embassy in Tel Aviv; Grose says to move it to Jerusalem, Israel's capital, is a "foolish and irresponsible" proposal -- despite repeated political promises to do so.

* Put a cap on economic support to Israel to stop fueling the runaway inflation that Israeli politicians do not have the courage to deal with.

* Send financial aid to improve the living conditions and productivity of Arabs on the West Bank, since, Grose says, they are not about to get either national self-determination or Israeli annexation.

* Support secular Israelis as against ultra-religious Jewish radicals who deny that American Jews, most of whom are Conservative or Reform rather than Orthodox, are Jews at all.

* Accept the premise that the 1967 borders on the Jordan River and the Golan Heights "may well hold firm for a long time to come."

* Somehow arrange "a stand-off understanding" between Israel and Syria to minimize the danger of renewed hostilities.

* When the time comes for Middle East mediation, invite the Soviet Union to be "in the supporting cast, rather than carping from the galleries."

These very debatable recommendations are an attempt by Grose (and presumably the Council's study group) to outline an American policy in response to a changing Israel. They deserve to be poured into the pot of the ongoing debate.