JERUSALEM -- In the bitter and drawn-out Arab-Israeli conflict, this city remains the grand prize, the irreducible minimum, the winning score in a zero-sum game. And when the setting sun casts its reflection upon the Old City walls and turns them to a rosy gold, it is not hard to see why.

Jerusalem is the last stop on the way to heaven, and the first place on earth. Its hold on the imagination of Moslem, Christian and Jew is both tangible and mystical. It evokes mortality and eternity in the same breathless moment. "Elsewhere you die and disintegrate," wrote Saul Bellow. "Here you die and mingle."

The physical city, the Jerusalem of stone, concrete and clay, has been reunited for 20 years under Jewish rule, ever since Israel vanquished Jordan in the June 1967 Six-Day War. A few weeks after the war's end, bulldozers leveled every barricade, every checkpost, every barbed-wire fence and antisniper wall between the Arab and Israeli parts of the city, all in one busy morning.

But the spiritual city, the Jerusalem of dreams, remains very much divided. The Palestine Liberation Organization's Yasser Arafat still evokes the vision of an independent Palestinian state with Jerusalem as its capital. Meanwhile, ultraorthodox Jews and right-wing nationalists lay plans to build a new version of Solomon's Temple on the site occupied for centuries by two of Islam's holiest mosques, and Jewish seminary students are being trained in animal sacrifices so that they can perform their priestly duties after the Messiah returns.

Such wildly disparate dreams cannot coexist in peace, and sometimes they draw blood. The deadliest in recent memory occurred in November when a Jewish religious student was stabbed to death by three Palestinian youths in the Moslem Quarter of the Old City, and young Jews from nearby working-class neighborhoods went on a week-long rampage, smashing windows of Arab shops and cars, burning houses and beating up passers-by.

It is a miracle, many observers say, that such incidents do not occur more often, given the explosive mix of incompatible elements that is modern Jerusalem. Jerusalem is Belfast without bombs, Berlin without the wall, Beirut without bullets, and although its passions have run far deeper for far longer, it is generally quieter, with a rate of violent crime far below that of most American cities.

One reason is that Arabs and Jews generally keep to their own neighborhoods and, in the words of local Jewish columnist Yosef Goell, to their "hermetically sealed separate mental worlds." There is almost no integrated housing. While Arab laborers are common in Jewish West Jerusalem, surveys indicate that Jews increasingly avoid the Arab sector because of fears for their safety. The two sections have different business centers, different bus systems, even different electricity grids. It is apartheid by uneasy mutual consent, rather than by statute -- what Mayor Teddy Kollek calls "a mosaic, a multicultural society, never a melting pot."

Indeed, the open conflict these days is no longer primarily Jew versus Arab. Jews themselves are increasingly at odds with each other, polarized between the growing ultraorthodox community and the shrinking majority who consider themselves secular. A poll of Jewish residents of Jerusalem last year showed that 44 percent saw as the city's major problem the religious-secular relations -- twice as many as chose Arab-Jewish relations.

Israel's military and police power keep these many disparate elements from waging war on each other and on the city they so reluctantly share. But the glue that has held them together in relative tranquility has been Kollek, the city's Viennese-born Jewish mayor.

Kollek is a gruff magician who has kept the peace by lowering expectations and perfecting the art of compromise. His heroes are David Ben-Gurion, the fiery prophet who founded the state of Israel, and Mayor Richard Daley, who sought to make Chicago the "city that works." Kollek has sought to combine one's vision with the other's pragmatism. In many ways, he is Israel's last giant.

Since becoming mayor in 1965, Kollek has built hundreds of gardens, sports grounds, plazas and groves, 25 libraries and 24 community centers, and he has transformed Jerusalem into Israel's recognized center of art and music.

Faced with a stingy central government, Kollek created his own purse strings by establishing the Jerusalem Foundation, which has collected and spent more than $100 million on urban improvements. Equally important, he managed to kill a number of grandiose projects, including high-rises, massive hotel developments and arterial highways, that would have scarred the city and its delicate skyline.

But the magician is aging -- Kollek turned 76 last week -- and many say his magic is fading. Charges of corruption against midlevel city officials have not touched Kollek but indicate to some that he is losing control. He admits he misread the seriousness of the situation last November and delayed in insisting that police crack down on Jewish rioting in the Moslem Quarter.

Many fear what will happen to this city when Kollek leaves the scene, for there is no heir-apparent, no giants left in the Holy Land. The mayor himself professes to be unperturbed. Israelis, he contends, "are a people who cannot live without hysteria." Outsiders expect Jerusalem to solve ethnic and political problems that other cities in Europe and the United States have yet to cope with. "There are many problems in this city," said Kollek, "and we'll solve them over the next 200 to 300 years."Jerusalem's Neighborhoods

The history of modern Jerusalem is to a great extent a story of neighborhoods, traffic arteries and land-use plans and the ways such planning tools can be used to serve political ends.

When the barriers came down 20 years ago, Jerusalem was a provincial backwater, stunted and disfigured by 19 years of physical separation from the rest of Israel after the country gained independence in 1948 and fought Jordan to a draw, leaving East Jerusalem in Jordanian hands.

As Jewish immigrants poured into the new state of Israel from Arab countries in the early 1950s, many were transplanted into grim, fortress-like apartment complexes along a no man's land abutting the sector controlled by Jordan. Instead of picture windows, many apartments displayed slits suitable for marksmen and the buildings were arranged in angular configurations designed to impede a tank assault.

These neighborhoods remain among Jerusalem's poorest and their younger residents were the shock troops in last November's anti-Arab violence. "These people lived through all those years under a siege mentality and they still retain a siege mentality even in the second generation," said Alan Freeman, a spokesman for the Jerusalem Foundation.

The no man's land was erased after the Six-Day War, when the state of Israel decided to annex East Jerusalem and adjoining areas to send a signal to the world that it would never permit the city to be divided again. The idea, said city architect David Kroyanker, was to claim "maximum land and minimum Arabs, to put it bluntly."

Since then the city has tripled in land size and doubled in population to 475,000 -- 340,000 Jews and 135,000 Arabs, of whom 121,000 are Moslems. Seven new Jewish neighborhoods were built along the outskirts on former Jordanian territory, communities that ring Arab areas and cut them off from the occupied West Bank and Jordan. The city has built more than 26,000 apartments for Jews since 1967, many of them on property expropriated from Arab landowners. It has built just 450 for Arabs.

Early on, long battles were fought between Israeli officials and their new Palestinian subjects who refused to recognize what they considered Israel's illegal usurpation of authority over their lives.

Palestinians erected -- and the authorities dismantled -- dozens of small memorials to the Jordanian war dead. Eventually the authorities relented and agreed to the construction of one public memorial, below the northwest corner of the Old City wall. That decision brought howls of protest from Israelis who called it a shrine to killers of Jews.

It took eight years for the authorities to abandon the attempt to impose Israeli curricula on East Jerusalem schools. They now use Jordanian curricula, although textbooks are censored to remove anti-Israeli references.

Kollek lists many improvements the city has made in East Jerusalem: doubling the number of classrooms, paving 60 miles of roads and building 40 miles of sewage lines. Despite the lack of public housing, the Palestinian population has nearly doubled in 20 years -- with Jordan and the PLO at one stage supplying joint grants to homebuilders.

But each side measures achievements by its own yardstick. While the city boasts that the Arab infant mortality rate has been cut by two-thirds, Palestinian physicians note that it is still double that of the Jewish community. There are four mother-and-child-care clinics in East Jerusalem -- and 28 in the rest of the city.

Kollek likes to point to the Sheik Jarrah Clinic, an Arab community health center in the Arab sector, built with about $6.5 million from his Jerusalem Foundation. But Nafez Nubani, the physician in charge, says the clinic is far from complete because of a shortage of money and manpower. Both he and Kollek contend that many Jewish donors to the foundation refuse to allow their money to be used for an Arab project, so it is still short about $3 million.

"There's no question that Mayor Kollek has made a lot of good efforts," said Nubani. "But there are many, many inequalities in health that people here feel very strongly."

Such inequalities are likely to continue, city officials argue, so long as Arabs refuse to play a role in city politics. For years Kollek has tried to cajole Arabs into running for the city council. But such an action would constitute recognition of the legitimacy of Israeli rule, something no East Jerusalem Arab is prepared publicly to do.

When Israel took control here, Arab residents were given the choice of applying for Israeli citizenship. Only about 1,000 did so, while the rest retained Jordanian passports. Nonetheless, all bona fide residents may vote in municipal elections and about 20 percent do so regularly, providing Kollek and his ticket with its margin of victory in several campaigns.

Indeed, some Israeli leaders see East Jerusalem as establishing a precedent that they eventually would like to extend to Arabs in the rest of the occupied territories.

"East Jerusalem is the model: apply Israeli law and at the same time offer the option of citizenship," said Cabinet minister Moshe Arens, a leader of the rightist Likud bloc. He says Israel ultimately will have to offer citizenship to those residents or risk sacrificing some of its most important democratic principles. And he believes that if Palestinians knew for certain that Jerusalem and the territories would always be part of Israel, they would be inclined to accept.

But a different process is taking place in East Jerusalem. Rather than becoming reconciled to Israeli rule, Palestinians have turned their sector into the unofficial capital of a growing nationalist movement.

Unlike the rest of the West Bank, where military law applies, East Jerusalem operates under Israeli civil statutes that allow a range of political activities and civil liberties unknown during the days of Jordanian rule and rare in the Arab world. There are trade unions, professional associations, five daily newspapers and at least two major weeklies, student organizations and a theater group. But the Palestinian press is scrutinized by the military censor far more closely than are Israeli or foreign reporters, and laws allowing six-month administrative detentions and other restrictions can be used against activists.

"The old emergency laws can still be applied, but there is the right of civil appeal and in fact there is a greater measure of freedom in East Jerusalem than in the West Bank," said Palestinian human rights lawyer Raja Shehadeh.

The result is a process of nation building that residents of East Jerusalem say is an ironic fruit of the annexation of their city. "We've developed the emotion, the heart and a common sense of political identity that we did not have under the Jordanians," said Sari Nusseibeh, professor of Islamic philosophy at Bir Zeit University and scion of an old Jerusalem family. "We've built an infrastructure in which every aspect of life helps provide the basis for a future state."

As a result, many Palestinians insist Kollek's efforts to make Arabs part of the polity of Jerusalem have not succeeded. "For me, the invisible border still exists," said Palestinian newspaper editor Daoud Kuttab. "I drive into West Jerusalem and I worry that my car will get a flat tire and I will be trapped there with no place to go."

In the end, said Kuttab, "A Palestinian in Jerusalem doesn't feel any different from a Palestinian on the West Bank or in Gaza. Your car may have a different license plate and you may qualify for social security, but basically you're a Palestinian and you're under occupation." The Influential Rightist Jews

It has become a Saturday afternoon ritual. Young bearded men in black hats gather downtown across the street from the Me and Me coffeeshop, sling a few rocks toward its windows and run for cover from pursuing police.

The law says that Me and Me can operate on the Jewish Sabbath. But Jerusalem's ultraorthodox believe Judaism's holiest city should honor God's laws, and they have lobbied hard over the years to close down movie houses, restaurants, sporting events and anything else that, in their view, defies God's will. When persuasion and money have not worked, rock-throwing mobs often have followed.

For generations the black-hatted haredim -- "those filled with awe" -- lived confined to the narrow back alleyways of Mea Shearim, an isolated compound that resembled a medieval East European ghetto and was jammed up against the border with Jordan.

The Six-Day War changed both the geography of Mea Shearim and the spiritual consciousness of many of its residents. The border vanished and new neighborhoods sprang up. Meanwhile, a new flood of religious Jews came to Jerusalem, inspired by the triumph of an almost biblical war. Many of the haredim themselves, who had been deeply suspicious of the Zionist state, changed their attitudes after the victory in which they detected the hand of God.

Religious Jews now constitute about 30 percent of Jerusalem's Jewish population and as they have grown, they have spilled out of the narrow confines of Mea Shearim into a dozen or more new neighborhoods, where they have sought to assert religious prerogatives -- often to the dismay of their secular neighbors.

In Ramot Alon, one of the massive new housing projects on the outskirts of town, the ultraorthodox fought against a community swimming pool in which men and women would have bathed together. When they lost at the local level, they sought to pull strings in the Knesset, with the small religious parties demanding that the pool be vetoed as their price for joining the new government formed after Menachem Begin's resignation in 1983.

State funding was withdrawn, but Kollek's Jerusalem Foundation completed the project with private money. Nonetheless, the pool maintains separate hours for men and women, plus coed family hours, and it takes no money on the Sabbath -- all concessions to the religious.

By contrast, Kollek lost his battle to build a soccer stadium in the northern part of the city in 1979 when the religious parties persuaded Begin to veto the funding. Eight years later the haredim are battling a new proposed site far from orthodox areas.

The battles often have spilled beyond the city council onto the streets. Groups of haredim vigilantes organized stonings of cars or burnings of bus stops displaying advertisements of scantily dressed women.

Secular vigilantes have responded by beating up haredim youths and vandalizing synagogues and religious schools. But many secular Jews are voting with their feet, leaving Jerusalem for more cosmopolitan Tel Aviv, where job opportunities are often greater and the movie houses remain open on Friday nights. Annually, 10,000 people leave Jerusalem, 1,000 more than come here. Most of those leaving are younger and better educated.

Kollek is worried about the outflow. He has encouraged a number of new high-tech projects designed to stem the brain drain and he also has sought to rein in the ultraorthodox. He says he is confident the conflict will fade, just as that between eastern Sephardic Jews and western Ashkenazim gradually lost steam a decade ago.

But Rabbi Meir Porush, leader of the ultraorthodox Agudat Yisrael faction and Kollek's religious nemesis on the city council, is less sure. Sometimes, said Porush, "the city is like dynamite -- if you light it, it will explode. I don't envisage the 20th anniversary of united Jerusalem as being very united." Tensions in the Old City

The Old City is the one place where Moslem, Christian and Jew cannot ignore each other. Its one-square-kilometer confines are too small, its population -- 17,000 Moslems, 4,000 Christian Arabs, 2,000 Armenians and 2,500 Jews -- too large. Here the assertiveness of Jewish nationalists and the demands for piety from the ultraorthodox, coupled with periodic Arab terrorist attacks on Jews, have created a potentially explosive combination.

While some residents in the Jewish Quarter are seeking to push non-Jews out of their neighborhood, others are buying up properties in the Moslem Quarter that they contend belonged to Jews before riots in 1929 forced them to flee. Still others are pressing for Jewish prayer rights atop the Temple Mount, a site holy to Islam, and their periodic forays to the site have brought out hundreds of angry Moslems in response.

Recently some Jewish Quarter residents sought to force two Arab bakeries in their section to close during Passover because the bread they bake violates the Passover code against leavened bread. The bakers refused and for a time a violent confrontation appeared likely. But Kollek's office stepped in and forced a compromise -- the bakeries remained open but sold bread only in black plastic bags from deep inside their shops. Signs were posted warning customers not to eat it while in the quarter.

Many residents were not satisfied. "I'd love to see them leave because they interfere with our lives," said Laura Caplan, a volunteer worker at the Jewish Heritage Information Center. "This quarter should be a completely Jewish area and it will always be a problem until it is."

But one longtime resident refused to sign a petition against the bakeries. Rivca Weingarten's family lived in the Jewish Quarter for six generations and her father was the neighborhood's chief rabbi until all Jews were expelled by the Jordanians in 1948. When Israel retook the quarter, she returned to rebuild her family home and open a museum on the ground floor depicting life in the area before 1948, a world now vanished.

She says many different ethnic and religious groups once lived in the Jewish Quarter and it was a place of tolerance and diversity whose passing she laments.

"We lived with Arabs all our lives. They respected us and we respected them," she recalled. "It's very different now. These Jewish people only see the bad gentile in everyone. This hurts me a lot because I believe you must judge every person for what he is."

NEXT: The Palestinians