Someone dubbed it "the Mercedes Army." Two of its vehicles, one green and the other brown, were parked near a checkpoint along the Lebanese coastal highway here. "Those cars are very well known here," said the driver of a jeep as he maneuvered through the barriers at the checkpoint.

The Mercedes Army belongs to Israel. It is part of Israel's continuing presence in a six- to 15-mile "security zone" north of the Israeli-Lebanese border, a lingering reminder that while the war in Lebanon is over, the conflict along the border goes on. That conflict has now unexpectedly affected the lives of 39 Americans, the remaining hostages from the hijacking of TWA Flight 847.

According to well-informed security sources here, there are about 100 to 150 Israeli military and civilian security personnel operating in the territory that is ostensibly under the control of the United Nations Interim Force in Lebanon (UNIFIL), and larger numbers of Israeli personnel south of the U.N. zone in the immediate border strip.

The U.N. area includes four fixed Israeli military positions, and there are another 60 fixed positions closer to the border but still inside Lebanon, the sources said.

The mixed forces of Israeli soldiers and agents of Israel's General Security Services still patrol the security zone, six months after the Israeli Cabinet voted to withdraw from Lebanon completely. They travel in Israeli military vehicles, civilian Mercedes -- the most poplular automobile in Lebanon -- and sometimes in military vehicles painted gray to look as though they belonged to the Israeli-backed local militia, the South Lebanon Army (SLA).

Israeli military officials have not disclosed the extent of their activity in Lebanon, but they describe it as "minimal."

This continuing Israeli presence in Lebanon is one of the key factors in the drama surrounding negotiations to win the freedom of the TWA hostages who are being held in Beirut. The hijackers, with the backing of Nabih Berri, head of the Shiite Moslem Amal militia, are demanding the release of more than 700 mostly Shiite prisoners from southern Lebanon in return for the American hostages.

Israel always planned to release all of the prisoners, who are confined in Atlit Prison south of Haifa, but it linked this policy to the situation in its security zone in southern Lebanon.

If attacks on the remaining Israeli soldiers and Israel's proxy militiamen from the SLA ceased or greatly diminished, Israeli officials said, the prisoners would soon be set free. If not, they suggested, some of the prisoners would remain confined at Atlit.

The test of this policy began in earnest on June 10. There was no official announcement that the Israeli Army had withdrawn completely from Lebanon -- for in fact it had not -- but on that day military officials passed the word that all soldiers except the relatively few who would continue to work with the SLA had returned across the border.

Four days later, TWA Flight 847 was hijacked, making the release of the Atlit prisoners a far more complicated issue and drawing the Reagan administration into a direct role in deciding their fate.

Between April 11 and June 14, the date of the hijacking, 604 prisoners were released from Atlit, according to Israeli Defense Ministry figures. Another 31 were released Monday in a decision Israeli officials insisted was not connected with the hijacking but was part of its ongoing policy and, in the case of nine of the 31, a judicial review that found no grounds to continue their detention.

During this same period, according to figures compiled by the U.N. force in southern Lebanon, there has been a sharp decline in the number of attacks on Israeli soldiers and SLA militiamen. So far this month, there have been a total of 46 such attacks, compared with 66 in May and 170 in April. In March, the peak month for attacks recorded by the United Nations, there were 220 assaults against Israeli targets in Lebanon and another 65 against Israel's local allies.

Speaking earlier this week in Tel Aviv, Defense Minister Yitzhak Rabin noted that Israel has experienced little trouble so far in the security zone. Since the near completion of the withdrawal on June 10, only two Israeli soldiers have been wounded in Lebanon and none killed.

But after all the disappointments and costs of the Lebanon war, and its heavy investment in the SLA to police the security zone, Israel was not yet ready to withdraw completely from Lebanon without a more thorough test of the security zone and the SLA's ability to police it. So the remaining prisoners stayed at Atlit, and then the hijacking intervened.

The SLA is also an actor in the hijacking drama. The militia is made up largely of Lebanese Christians and is commanded by a Christian, Antoine Lahad. It is viewed by the Shiites of southern Lebanon as a mere extension of the Israeli Army, which has long demonstrated grave doubts about its proxy's ability to stand on its own in protecting Israel's northern border.

Even before the hijacking, the SLA had embroiled Israel in an international incident. Earlier this month, the SLA kidnaped more than 20 Finnish soldiers from UNIFIL, holding them hostage while, with Israel's backing, it demanded the return of 11 of its militiamen whom it claimed had been turned over to the rival Amal militia by the Finns.

U.N. sources today confirmed reports in the Israeli press that the alleged abduction of the SLA men and their handing over to Amal was "staged" with the help of a Finnish U.N. unit, apparently in an attempt to prevent retribution against their families by SLA commanders because of the defection.

Last week, in the midst of the hijacking drama, the SLA also bombarded two Shiite villages it described as terrorist centers, reportedly forcing at least 2,000 village residents to flee their homes.

According to both western and Lebanese sources in southern Lebanon, the existence of the security zone, the continuing Israeli military presence within it and the role of the SLA as Israel's proxy are feeding the competition among Shiite organizations to be seen as the faction that finally drives Israel completely out of Lebanon.

The TWA hijacking and the demand for the immediate release of the Lebanese prisoners held by Israel are the latest twist in that increasingly deadly competition, according to these sources.