The Army announced today that it has arrested three West Bank Arab youths in the kidnap-slaying a week ago of two Jewish school teachers in northern Israel. The announcement came as the victims were buried and demands intensified for use of the death penalty against Arab terrorists convicted of murder.

As the Cabinet of Prime Minister Shimon Peres prepared to debate the controversial issue Monday, Yosef Eliahu, 35, and Leah Elmakais, 19, were buried in separate services amid an emotional public cry for harsh security measures against nationalist Palestinians, both in Israel and in the occupied territories.

Eliahu and Elmakais, who had disappeared early last week while driving home from work, were found Friday in a cave near Afula, bound and shot to death in the latest of a series of similar killings that has shaken Israeli society as much as any terrorist wave in recent times.

The Army command said today that the three Arab youths, aged 17 to 19, all high school students and shepherds' sons, were arrested at their homes near Jenin in the northernmost part of the West Bank, about 10 miles south of Afula. An Army spokesman said they had surrendered a stolen rifle used in the slayings and had reenacted the crime for investigators.

Although the suspects have not been tried yet, the government said tonight that it had demolished the houses occupied by their families.

Police Minister Chaim Bar-Lev said tonight that the three acted alone with no established terrorist organization behind them but that their motive was "nationalistic."

Prompted by rising anti-Arab sentiment in the region and a series of attacks on Palestinians by angry mobs late last week, more than 650 policemen were sent to Afula to maintain order during the funeral for Eliahu. Several senior Cabinet ministers attended the funerals, including Deputy Prime Minister David Levy, who said: "A civilized society cannot tolerate the spilling of its citizens' blood by murderers. We will not rest until the taking of lives is implemented against those who took the lives of peaceful, constructive citizens and educators."

The question of whether to use capital punishment to deter terrorism has evolved into one of Israel's most divisive national debates in months, with the coalition Cabinet split nearly along party lines but Labor Party opponents of the death penalty and their allies having an apparent edge in Cabinet votes on the issue over the Likud faction.

Israel already has capital punishment, but it has been used only once -- against Nazi war criminal Adolph Eichmann, in 1961 -- and the issue now is whether to apply it to curb what is perceived as a new wave of Arab terrorism inside the original boundaries of Israel.

Foreign Minister Yitzhak Shamir, in a radio interview today, linked use of the death penalty to Israel's exchange in May of 1,150 Arab prisoners for three captured Israeli soldiers.

"We must take into account the fact that not long ago, many terrorists were released from prison before they had served out their sentences, and that this put an end to the deterrent effect of prison sentences. Therefore, we should definitely adopt this extreme measure," Shamir said.

Yakov Tsur, the minister for immigrant absorption and leader of the opposition in the Cabinet to capital punishment, said in an interview that the death penalty is "an answer not to the problem of terrorism, but an answer to some people's need for vengeance."

He noted that in 1973 the Labor government told the Army not to ask military courts for the death penalty for terrorists because it was not considered an effective deterrent and "could bring an escalation such as a situation of hijacking Jews in Israel or elsewhere in the world."

Tsur said he and many other Cabinet ministers were also opposed to capital punishment on moral grounds. "Our main power is that our values are not the same as our enemies'," he said. "We have to keep our own values and not assimilate the values of Lebanon or the PLO."