VERONICA Or The Two Nations By David Caute Arcade/Little, Brown. 318 pp. $19.95

DAVID CAUTE'S Veronica, or The Two Nations is a melodrama of incestuous passion, a political thriller, a quirky updating of a famous Victorian novel, and an examination of the social and political condition of England in the 1980s. Caute's integration of these disparate elements is not flawless, but it's close enough. Veronica is splendid.

The protagonist and principal narrator is Michael Parsons, British home secretary in the late '80s and a leading candidate to succeed Margaret Thatcher as prime minister. The story he tells begins in 1939 when Veronica King comes to live with the Parsons family -- 11-year-old Michael; his father, an RAF wing commander, and his mother, an earnest do-gooder with leftist leanings. Described by Michael's mother as a "distant cousin," Veronica is 15, a beautiful and exotic creature with red-gold hair and a South African upbringing.

"I fell in love instantly," Michael Parsons writes. "Half a century later, as I write this memoir, my love remains undiminished."

He nicknames her V, for victory.

V and Michael are sent to the same progressive school, Greendale. There the studious and unathletic Michael is persecuted as "a swot, a squirt and a fart" (i.e., a nerd). Veronica, on the other hand, is immensely popular with both sexes, "brilliant at games" and a natural leader.

Though envy and resentment figure largely in Michael's psyche, the contrast between their school days does not diminish his love -- or his lust -- for V. His mother, however, clearly dislikes her. When the opportunity arises, after Veronica has finished school, to send her back to Greendale as "games mistress," Mrs. Parsons leaps at it. She also arranges for Veronica to help supervise a group of rowdy London slum kids shipped to Greendale during school holidays to soak up "fresh air, enlightenment and exercise." It's one of Mrs. Parsons's pet projects; it's also a convenient way to keep Veronica at a distance.

But by this time Michael's father has died in the war. After Mrs. Parsons is also killed (by a bomb falling on her Dig for Victory cabbage patch), Michael moves into Veronica's lodgings during school breaks. Proximity fuels his passion. So importunate are his sexual advances that Veronica decides she must tell him the family secret the reader has already deduced: She is not Michael's cousin but his half-sister, the daughter of his father and his mother's sister.

The revelation comes too late: Obsessed and unscrupulous Michael and kind-hearted Veronica are already embarked on a road toward disaster.

Alternating with the chapters in which Michael tells his story are others in another voice. The earliest of these describe a series of essays in the Spectator, signed by one "John Ford," which analyze the theme of sibling incest in a variety of texts -- Melville's Pierre, Mann's The Holy Sinner, Sartre's "Altona," the real John Ford's 17th-century tragedy " 'Tis Pity She's a Whore." Gradually it emerges that these present-tense chapters are the work of a left-wing tabloid journalist, one Bertie Frame, who is gathering evidence that he hopes will ruin Home Secretary Michael Parsons, while simultaneously making Frame's fortunes on Fleet Street. Bertie has discovered that "John Ford" is really Michael, who, like a murderer driven to revisit the scene of his crime, obsessively gnaws at the theme of incest in this semi-public forum.

Bertie Frame's motives in hounding Michael are not just political and professional; they are also personal. He was one of the East End slum kids brought to Greendale during the war, grimy, foul-mouthed delinquents despised by Michael as "plebian brats." The brats returned Michael's scorn in spades, but they adored friendly, generous and fair-minded Veronica.

The suspense in Veronica, then, is two-fold: Michael's unfolding story of what became of his beloved V, and the escalating battle of wits between Bertie and Michael in which the stakes are Michael's career and reputation.

The enmity between Michael and Bertie becomes the focus of the novel's political and social themes, hinted at in the novel's subtitle and made explicit in Michael's fascination with the book that is its source, Benjamin Disraeli's 1845 novel, Sybil, or The Two Nations. In it, the future Tory prime minister combined a love story with a scathing portrait of an England that was, in Disraeli's famous formulation, not one nation but two:

"Two nations; between whom there is no intercourse and no sympathy; who are as ignorant of each other's habits, thoughts, and feelings, as if they were dwellers in different zones, or inhabitants of different planets . . ."

The two nations were, of course, the Rich and the Poor. A century later the economic gap between Rich and Poor had narrowed, but the class system, with its festering resentments, remained intact. Writes Bertie of wartime London: "We knew that the Huns were only bombing poor people because they had a deal with the rich."

In his reading of Sybil, young Michael sees only the lurking threat of the discontented masses, "a pent-up force of envy and destruction biding its time." In his political career, the great enemy is "the Leviathan of Collectivism . . . the Rule of raw Envy." His gods are "pluralism, competition, market forces."

Michael is supremely sure of himself, Bertie much less so. The dockworker's son has risen on the social scale through a combination of luck, brains, hard work and "raw envy." He despises himself for "sipping sherry and playing the game" with a political ally of Michael's; he supports unions and strikers and the Labor Party, keeping "faith after my fashion." But Bertie also is appalled by the disarray of the Left, by the pervasive racism of the working class, by a nation that "resembles an overturned litter bin. No pride in anything. That's one thing She {Thatcher}'s right about." DAVID CAUTE, man of the left and theoretician of the literature of commitment, seems more than a little ambivalent himself about the working-class leftists of the new era. But there is nothing ambivalent about his portrayal of his Tory MP. Michael is a nasty piece of work, cold, calculating, selfish. Even his grand passion for V is a form of snobbery and self-love. As "John Ford" writes of the aristocratic justification of brother-sister incest: "They alone are good enough for one another."

Yet one of the book's many ironies is that Michael and Bertie have much in common. Though Michael is a first-class snob (deriding even his leader, Thatcher, for her "corner-shop mind"), he is not from a first-class background. "Quite humble and impecunious," one political ally remarks, "the poor end of the officer class." Both Michael and Bertie are self-made men, beneficiaries of a system that each, in his own way, scorns.

Caute has written six other novels that have not been much noticed in this country. That should change with Veronica, which in addition to its engrossing plot and political insight, is beautifully constructed. Though the arcane lingo of British politics (Wets and Drys?) can be daunting to an American reader, the novel rewards perseverance, speaking to fundamental issues in this time of worldwide political change.

Like Disraeli's Sybil, Caute's Veronica is more descriptive than prescriptive, offering no simple solutions for the social ills it depicts. Proclaims Michael Parsons of his political mission: "Give them possessions and a genuine 'enterprise culture' -- and they'll never vote Socialist again."

Ah, yes. But then what? Nina King is editor of Book World.