Lined up along a palm-shaded beach at the northern edge of this ancient Mediterranean coastal town in the occupied Sinai Peninsula, olive-drab Israeli Army bulldozers are poised to cut a wide swath southward for what the 85,000 Arab inhabitants fear will become "the Berlin Wall of the Middle East."

A paradox of the 1979 Egyptian-Israeli treaty is that Rafah, which has endured and survived dozens of wars since it was a battleground for Assyrian and Egyptian armies in the 8th century B.C., is about to become a victim of peace.

With only three months left before Israel is scheduled to complete its withdrawal from the last remaining occupied portion of the Sinai Peninsula, Rafah residents are becoming increasingly anxious over the social and economic dislocation facing them because of the Israeli pullback.

The town straddles the international border between Egypt and the Israeli-occupied Gaza Strip, and, according to the terms of the peace treaty, it is about to be split in half.

Families will be divided, friends separated and thousands of townspeople of Palestinian and Egyptian origin will become part of a massive population transfer from one side to the other to avoid becoming trapped in alien territory.

Israeli Defense Minister Ariel Sharon left today for Cairo to talk with Egyptian Foreign Minister Kamal Hassan Ali about what to do about the residents, homes and property of Rafah, but so far neither side has proposed any ideas for avoiding the upheaval that will result from the Sinai withdrawal.

The frontier will slice through the middle of homes and businesses, across streets and through flourishing orange- and guava-tree groves and vegatable gardens, dividing one town overnight into two distinct cultures and nationalities.

Standing on the roof of an ice factory that his family owns, Fathi Zorub placed his feet astride a black-and-white marker pole erected by a joint Egyptian-Israeli survey team a month ago and said, "See, one foot in Rafah Palestine and one foot in Rafah Egypt." Zorub pointed to a nearby house that has one door in territory designated for Egypt and another door in Israeli-controlled Gaza.

"We've had three wars right here in my lifetime--1948, 1956 and 1967 --but nobody was hurt in those wars. Now, because of the peace, all the people will be hurt. Now we will lose everything," said Zorub, an Egyptian citizen who will be forced to move from the Gaza side of Rafah to the Egyptian side before the April 25 Israeli handover.

"If they make Rafah like Berlin, we will be cut off from each other. All the people from Sinai who came to buy goods will be cut off. We don't know what will happen to us," Zorub said.

The dilemma stems from the Camp David peace talks, when Egypt, Israel and the United States agreed on the Egyptian-Israeli border, designating the line that was drawn by the British in 1906 to separate Turkish-controlled Palestine from British-controlled Egypt. The line runs from Rafah southeastward to Eilat, which is on the northern end of the Gulf of Aqaba.

The Camp David delegates appeared to have given little thought to what effect the boundary would have on Rafah, which has burgeoned in population in recent years because of Palestinians who fled to the Gaza Strip in 1948 and, later, by refugees who were evicted from their homes when the Israeli Army cut security roads through Gaza refugee camps in the 1970s.

The maps accompanying the White House-issued copy of the peace treaty show the international boundary, but do not even indicate the presence of Rafah, a dusty and unattractive town that since ancient times has been a strategic crossing of the north Sinai road, and where Antony married Cleopatra.

While Egypt maintained a formal distinction between its sovereignty of the Sinai and its occupation of the Gaza Strip between 1948 and 1967, movement between the two parts of town was easy, with only casual checks of cars and no restrictions on pedestrian traffic. After the Israeli occupation of the Sinai in the 1967 war, the two sides of the town were merged, with one Israeli-appointed municipal council, and the townspeople gradually forgot about the old border.

The only distinction since 1967 has been that people who lived on the Gaza side have had their Israeli-issued identity cards stamped "Rafah Falastin" (Palestine) and those on the Egyptian side labeled "Rafah Sinai."

Deputy Mayor Hilmi Zorub, who runs the government for his aging father, said that when the town is divided on April 25, about 65,000 residents will be living on the Gaza side and about 20,000 on the Egyptian side, with apparently no access to each other unless they go through the customs and passport procedures at the border terminal.

Zorub said that 5,000 persons with identity cards marked "Rafah Sinai" but who now live on the Gaza side of the line will have to move to the Egyptian side. Similarly, about 3,000 Palestinians on the Egyptian side will have to move to the Gaza side, he said. Zorub, an Egyptian citizen, said he will move from Gaza to Egypt.

The most pressing problem, Zorub said, is the plight of 516 Palestinian families who were moved from their Gaza refugee camps in the 1970s to live in what once was a camp for the Canadian contingent to the U.N. peace-keeping force on the Egyptian side of the border. They presumably will have to move to the Gaza side, but no arrangements have been made yet for their resettlement.

"This will be the third move for them. First the Israelis moved them from Palestine to Gaza in 1948, then they moved them from Gaza to Rafah Sinai, and now they are moving them back. We ask them the Israeli authorities every day, 'What will you do?' but they have no answer," Zorub said.

Residents and businessmen along the border have been given questionnaires to report compensation claims, but they have not returned them, preferring instead to wait to see if Egypt and Israel cannot agree to border modifications, said Atia Abu Moor, local project coordinator of the community development foundation.

"Why do they have to move people, destroy homes and ruin crops, when the line could be changed to avoid that?" Moor asked. "When we ask the Israelis, they say the line was drawn in 1906, and there is nothing they can do."

While Israeli officials say they want to avoid property damage, there appears to be little chance that it can be avoided, given the Army's concern for security along all of Israel's borders. The frontiers along Lebanon, Syria and Jordan all have wide "no man's land" areas with heavy fences and dirt tracks that are swept several times a day to detect footprints of infiltrators.

Hilmi Zorub said he had been told by the Army that the "no man's land" would be 44 yards wide, running about three miles through the middle of town, but he said he suspects that the Army will take even more land than that.

Indeed, Army bulldozers already have started to cut two wide tracks about 150 yards apart stretching from the edge of the Mediterranean southward across sand dunes about a quarter mile toward the town center.

Another Zorub cousin, Massoud Hussein, 35, showed a reporter an oasis he owns that the bulldozers already have sliced through, destroying guava groves and cutting off irrigation ditches that run between a natural spring and an adjacent vegetable field.

"For years, my grandfather and father owned this land, on both sides of the border," Hussein said. "We moved sand dunes to make the land good for cultivation. Now they are ruining it, and they haven't said a word to me."