THE QUESTION of the West Bank "loyalty oath" goes to the heart of what is wrong about the continued Israeli occupation. Overall, the occupation is, by the standards of such things, mild -- more liberal, even, than the rule many governments practice over their own citizens. Yet there is an irreducible core of coercion in any occupation, and in Israel's case it is painfully inconsistent both with the Jewish state's own best traditions and with its requirement to uphold the shared values that sustain its relationship with the United States.

The oath asked foreign teachers at West Bank universities, as a condition of remaining at their posts, to pledge they will not aid the PLO. It stemmed from a military order written in 1980 but not put into effect at that time because, for one reason, the occupation administration already had all the expulsion authority it needed. In 1982, however, Defense Minister Ariel Sharon appointed a civilian administrator, Prof. Menachem Milson (since resigned), to remove all PLO elements, evidently meaning all elements believed by the Israelis to support Palestinan nationalism. Mr. Milson set out by dissolving municipalities, dismissing elected mayors and tightening censorship, among other things.

To clamp down on universities, he began enforcing "Order 854's" requirement of an anti-PLO oath for foreign teachers, who are especially important to the West Bank's institutions. Many Israeli academics saw the oath as an instrument of intimidation and joined West Bank residents in protest against it.

Recently Secretary of State Shultz denounced the oath. His evident purpose was to promote American policy, but his personal feelings as a former academic came through. The Israelis then announced they were suspending that particular requirement, but the meaning of the change was not immediately clear.

The question of the oath was, in any event, only a symptom. The source of the difficulty is the Israeli occupation. As long as it goes on, Israel will have to deal with the resentments of the occupied. One of the principal attractions of the Reagan peace proposals of Sept. 1 is that they offer Israel a chance to end the occupation -- to put down the burden of the West Bank.