Israeli security forces stepped up their crackdown on militant Palestinian nationalism here on the occupied West Bank today, arresting protest leaders and increasing the military presence in most towns in an apparent application of Defense Minister Ariel Sharon's new "carrot-and-stick" approach to the occupied territories.

Army troops surrounded this hillside town of 15,000 population early this morning after a youth threw a bottle of flammable liquid at a military vehicle, and the nearby Bethlehem University was sealed off after its chairman was warned that the campus would be closed indefinitely if students do not end protest strikes.

Bir Zeit University, the West Bank's largest Arab university, remained closed for the second week, and security forces continued making arrests of persons suspected of organizing demonstrations, including the leaders of the physicians', lawyers' and engineers' unions in the West Bank.

After more than a year of relative calm in the West Bank, the current disturbances took the Palestinian-Israeli confrontation back to a level approaching the intensity that followed the deportation and car-bombing of several prominent mayors last year.

Among those arrested were Ahram Khania, editor of East Jerusalem's Al Shaab Arabic newspaper. Also, the Israeli military censor ordered the Arabic newspaper, Al Fajr, closed for 10 days for allegedly printing leaflets calling for general strikes. Editors at the newspaper denied printing leaflets and said the closing stemmed from the paper's opposition to new West Bank policies.

The crackdown underscored Sharon's warning on Monday that any attempts by Palestinian nationalists to undermine the military government's efforts to "create a better atmosphere between the local population and Israel" would be dealt with harshly.

"For the peaceful population, it will be an entirely different era. For everyone who participates in hostile activities, it will be very, very hard," Sharon said.

He was referring to attempts by a new Israeli civilian occupation government, led by former Hebrew University professor Menachem Milson, to bring moderate Palestinians into the process of governing themselves on a limited scale as negotiations for autonomy in the West Bank and Gaza Strip are resumed. The Egyptian-Israeli autonomy talks reconvened today in Cairo.

Milson's civilian administration has been in office only 10 days, but it has been the target of Arab demonstrations in some part of the West Bank every day.

The security forces' crackdown appeared to signal an end, at least temporarily, to Sharon's much-heralded "relaxation" policy in the West Bank and Gaza Strip, in which the defense minister had promised to cut back on roadblocks, prohibit Army troops from breaking into schools and put an end to collective punishment.

While roadblocks remain noticeably diminished, both Bir Zeit and Bethlehem University campuses have been raided by security forces, curfews have been imposed on villages and houses have been destroyed by Army demolition teams in retaliation for attacks by individuals against Israeli civilians and military personnel.

Bethlehem Mayor Elias Freij, in an interview today, said, Sharon "promised the Army wouldn't go into schools and would end roadblocks and collective punishment. What is this? It is worse than ever now."

Freij pointed to several stores in Bethlehem that had closed today to protest of the crackdown and whose steel shutters were welded shut by Israeli Army troops as punishment. He said the owners had been told the doors would remain welded for 50 days.

In Ramallah today, about half the stores were shut in protest of the Bir Zeit closing and Milson's appointment. Israeli Army patrols had closed the main street in front of the Bir Zeit University, and prevented a reporter from approaching the campus.

Freij, who is also chairman of the Vatican-funded Bethlehem University, said he had been summoned by the local military governor and warned that if the student protest strike does not end, the university will be closed indefinitely, as Bir Zeit has been. Security forces refused to let reporters near the campus today.

In a press conference yesterday, Bir Zeit officials said Israeli troops had arrested several faculty members suspected of instigating protests, and had placed other university officials, including the acting president, Gabi Baramki, under house arrest.

The Israeli Army command confirmed the arrests and house arrest orders, saying they were necessary to maintain order at the university, long considered a center of militant Palestinian nationalism.

Meanwhile, four West Bank Arabs were convicted in a military court in Nablus today of charges of murder stemming from the April 1980 ambush of civilian settlers in Hebron, in which six settlers were killed and 17 were injured. The Arabs had been accused of opening fire with automatic weapons as a group of settlers walked from prayer services on the Sabbath.