CAIRO - Before Israeli diplomat Issac Bar-Moshe drives to work in the morning, he looks around his house for suspicious people and checks his car for explosives. ''I can't deny there is fear. Nobody can deny it,'' he says.

Seven years after the signing of the Egyptian-Israeli peace treaty, Cairo remains an inhospitable place for Israelis. The early euphoria over the Camp David Accords and the chance that they could lead to a reconciliation between Arabs and Jews in the Middle East has dissipated, giving way to distrust and animosity.

In the past year, nine Israelis have been murdered in Egypt. Two of those killed were from the Israeli Embassy in Cairo. The seven others were tourists gunned down last October by Egyptian border policeman Suleiman Khater, who want on a rampage in the Sinai. Khater was later reported to have committed suicide in prison.

The murders were officially condemned in Egypt, but public expressions of sympathy for the killers were common.

The effect of the violence has been to exacerbate longstanding distrust between Israelis and Egyptians.

In the year before the Khater killings, about 60,000 Ksraeli tourists visited Egypt, and Egyptian tourism to Israel was beginning to pick up. Trade had also begun. But border crossings are now few, and commercial dealings are rare.

Beyond fear, the issue most impeding normal relations remains a dispute over Taba, a 700-yard stretch of beach on the Gulf of Aqaba in the Sinai that is claimed by both Israel and Egypt and occupied by Israel. Negotiators say their differences are nearly overcome, and an agreement to send the issue to arbitration may be in hand within two weeks.

An agreement would probably mean the return of the Egyptian ambassador to Tel Aviv, and a first-ever meeting between Eqyptian President Hosni Mubarak and Israeli Prime Minister Shimon Peres.

Many observers hope that a settlement on Taba will break the barrier of suspicion that has characterized seven years of Egyptian-Israeli cold peace. Others are skeptical.

The chill in post-Camp David relations dates to the June, 1981 Israeli bombing of a Iraqi nuclear reactor, followed the next year by the Israeli invasion of Lebanon. The Egyptian ambassador was recalled from Tel Aviv to portest the invasion and the subsequent massacre by Lebanese Christian militiamen of Palestinians in the Sabra and Shatila refugee camps.

The building of more Jewish settlements in the territories occupied by Israel in the 1967 war, and the attack on Palestine Liberation Organization headquarters in Tunis last year further irked Egyptians.

"We concluded peace, and then they invaded Lebanon and killed Palestinians, and they're still doing that," said a senior Egyptian Foreign Ministry official. He added, "You can't sell it here."

What is being sold in Egypt, mainly by the small but vocal opposition, is an extreme anti-Israeli line. Opposition newspapers made a hero out of policeman-murderer Khater and published "blacklists" of Egyptians who cooperated with Israelis.

Dr. Mohammed Shalaan, chairman of the department of psychiatry and neurology at Al Azhar University, was included in a blacklist published by the Al Shaab opposition paper. The column, which was headed by a Star of David, assailed Shalaan for meeting with Israelis.

"They claim that I am doing for Israel what they couldn't achieve through Camp David," said Shalaan, a promoter of Egyptian-Israeli cooperation. "I visited (Israel) once, but I haven't dared to do it again."

In 1984, Shalaan hosted a conference that included Jews, Moslems, Christians and Buddhists. The conference was designed to promote religious understanding, but was attacked as a forum for Jewish women to seduce Moslem men, and for Jewish psychiatrists to spy on Egyptians.

"It's so stupid, so stupid," said Shalaan, shaking his head. He maintains that one of his colleagues at Al Azhar was fired after participating in the conference, and that he himself has since been harassed by the administration of the Islamic university.

His frustration is shared by Bar-Moshe, the Israeli press attache. "The last five years didn't produce one single news item about something positive that happened in Israel," he said.

Bar-Moshe believes that the vast majority of Egyptians support peace, and that the opposition is alone in trying to sway public opinion. He faults the government for not taking a more active role in educating people toward peace.

A strong Israeli concern is that internal conditions in Egypt may one day provoke a hostile change in policy.

"The public today remembers the wars," said one Israeli government source. "I'm afraid, looking at Egypt 10 years from today, if the economic situation will deteriorate and if the Islamic fundamentalist influence will strengthen, they will raise a new generation that doesn't remember war with Israel, and will run the risk" of a new one.

Egyptian school children take such improbable holidays as the one celebrating the 1958-1961 unity accord with Syria, but there is no day off to mark th signing of the peace treaty with Israel.

A state of peace has to grow naturally and "cannot be imposed," one Egyptian said. The Israelis, it is argued, have created unfavorable conditions for peace by "acting like a regional superpower."

"In that climate, we can't say Israel is okay and does wonderful things," said the Egyptian foreign ministry official.

One area where cooperation is quietly occuring is science. Four U.S.-financed joint projects between Egypt and Israel have been established; two in agriculture, one in marine science and one in disease control.