AMMAN, JORDAN -- Twenty years ago, as Israel celebrated the expansion of its territorial domain, a sense of humiliation and despair hung over the Arab world.

The armies of Egypt, Jordan and Syria lay in ruins, the dream of strong and united Arab nations dominating northern Africa and the Middle East shattered beyond redemption. But for more than 700,000 Palestinians, the disastrous war left them with the dilemma of living under Jewish occupation or fleeing as refugees from lands their ancestors had settled on or wandered over for two centuries.

Among the Palestinian refugees were citrus farmers from Jaffa and Lydda, shepherds of Judea and Samaria and fishermen from Tiberias on the shores of the Sea of Galilee. Their families were large and tradition-bound. Their sons and daughters were among the best educated in the region.

Many of the prosperous fled the occupation. Some were able to relocate in this Arab capital across the Jordan River, and their numbers now account for 65 percent of the country's population. Others resettled in the Persian Gulf states, where their commerce and industry helped build the economies of Kuwait and Saudi Arabia.

Still others emigrated to Europe, Australia, Canada and the United States, creating a Palestinian diaspora that is estimated at 5 million today.

But roughly one in five had no option to leave, or chose to stay, to live under the Israeli occupation authority. They have clung to land and businesses in the occupied territories; they remain defiant, bitter, caught in a perpetual cycle of disenchantment over efforts to restore the dignity and political independence for which they have always strived.

The most unfortunate -- many of them trapped in refugee camps since Israel's creation in 1948 -- were pushed into other camps in Gaza, the West Bank and Jordan, where they still live, often in primitive conditions.

Across Israel's political spectrum, the plight of the Palestinians evokes both sympathy and enmity. Some Jewish liberals have stood up for the Palestinians' liberation while rightists have pushed them off their lands to make room for new Jewish settlements.

According to U.S. officials, including Ambassador Thomas Pickering, they face increasingly repressive measures from aggressive Israeli settlers and from the Israeli military authorities who administer the territories.

The attitude of hard-line Israelis devoted to expanding Jewish dominion over what had been Arab lands was expressed by the late Golda Meir when she declared that there "are no Palestinians."

Instead, Israel's pioneer spirit remains, propelled by religious fervor and nationalist momentum toward its own manifest destiny as, in the words of a turn-of-the-century Jewish writer: "A land without a people for a people without a land."

In 20 years of occupation, there have been political majorities in Israel both for returning occupied lands and, more recently, for keeping that which Israel fought for and which represents to many Israelis the biblical heritage of the Jewish people.

But a settlement to what some have called the most intractable problem on Earth has eluded a succession of world leaders.

Thus, in the postwar Arab world, no issue has given voice to the Arab cause more than the fate of the landless and nationless Palestinians, whose refugee camps have become Third World hovels and the violent arena of the still-festering Middle East conflict.

The 1967 war had been fought by Egypt, Syria and Jordan in their name, to destroy the Jewish state in the name of Arab honor, rights and lands, and it has become an anniversary of humiliation here and in the capitals of Cairo and Damascus, whose leaders at the time rose to lead the Arab nation against Israel.

Some Arab leaders cynically took the Palestinian mantle as a means of diverting their populations from pressing problems at home -- failed economies, domestic unrest. For these leaders, the Palestinian cause has been an opportunity for repression in a region where democracy has been slow to take hold.

For Palestinians, too, the radicalization of their cause has led to a different kind of cynicism. The history of the Palestinian movement is intertwined with an endless series of violent acts and shocking episodes of terrorism.

It is this image of Palestinian terrorism that has most damaged the Palestinian cause, particularly in the United States.The Founding of the PLO

From the outset, each stage of the modern Middle East crisis has built on the previous one.

The brief war that followed when Israel declared its independence in 1948 and was attacked by Arab states pushed 800,000 Palestinian refugees off what they considered their traditional lands -- in an area claimed and inhabited by both sides over the centuries. Many of them were settled in camps in southern Lebanon, but the majority settled in Jordan, where, by May 1967, there were 722,687 refugees registered with the United Nations.

"In the two decades following the Arab-Israeli war of 1948, the Jordanian kingdom's failure to integrate fully the Palestinian refugees into the nation resulted in an insoluble problem for the government," according to Samir A. Mutawi, an adviser to King Hussein and author of a new study of Jordan's role in the 1967 war.

"Their miserable state and subsequent bitterness made them susceptible to the propaganda of the radical Arab states such as Egypt and Syria, with resulting sporadic civil unrest," Mutawi said.

Added Jordan's Foreign Minister Taher Masri, "Because of what the leaders of Arab countries had been telling . . . their own people regarding Israel before 1967 and because of the quick collapse of the Arab armies, the Arab citizens, in particular the Palestinians and Jordanians, have felt that defeat."

"I think that has led the individuals to look for an alternative," Masri added.

One of the alternatives that flourished because of this discontent was the Palestine Liberation Organization, which had been formed at the Cairo summit of Arab states in 1964.

The PLO was created over the opposition of Hussein, who saw in its establishment a competing leadership among half of his subjects and a potential source of subversion against both Israel and his own regime.

Longtime palace adviser Adnan Abu Odeh told a recent interviewer that Hussein acquiesced only because he already was under attack in the Arab world for his pro-western attitudes. Hussein wanted to strengthen his ties to the radical Arab states to whom he looked for military assistance and economic aid.

Under its first leader, Ahmed Shukairy, the PLO was largely a propaganda organ -- a creature of the radical Arab regimes of the day -- that helped whip up the war fever before the 1967 conflict.

But from the wreckage of the Arab armies' defeat emerged a new PLO leader, a former student organizer at Cairo University, Yasser Arafat.

Under Arafat, the PLO has developed both political and paramilitary arms. In the name of the PLO and its various splinter groups, thousands of terrorist attacks have been launched against Israel and its diplomats abroad and against unarmed civilians worldwide.

Israel has always struck back, and thousands of Palestinians have died in retaliatory raids.

During these years, the competition between Arafat and Hussein, among others, for the loyalty of the Palestinian people has been a dominant factor in Middle East politics ever since Arafat's ascent.

The shock of losing the West Bank in 1967 put the Arab leaders, especially Hussein, on the defensive. "Every time I think about our blunder {in entering the war}, I go mad," said Hazem Nuseibah, longtime Jordanian ambassador to the United Nations.

The Arab defeat gave Arafat an opening to step onto the world stage.

"I succeeded," Arafat said in an interview for this series, "to shift the destiny of my people from refugee statistics in {the United Nations} to freedom fighters . . . to realities and facts in Middle East politics."

For Hussein, however, 1967 was a dark period in Jordan's history.

Hussein "feels he lost the West Bank and that's an awful thing because the Moslem shrines are there," said one Palestinian leader living in Jordan, who spoke on the condition that he not be identified.

"This is very hard," he continued, "because you know these Arab leaders build themselves up that they are the descendants of Mohammed and this is the worst thing."

The PLO at best has had a checkered performance on behalf of the Palestinians, yet its image and loyalty remain strong, according to an authoritative opinion poll conducted last year in the occupied territories.

The PLO's critics say it has become an irrelevant holding operation, more determined to perpetuate its substantial bureaucracy and leadership than in reaching a solution.

"I don't know that it has accomplished much," said former Gaza mayor Rashad Shawa. "The PLO has made our case more known internationally, but locally it has lost; Israel has been able to put its hands on everything."

One of Hussein's advisers, a longtime critic of Arafat, added, "The most tragic aspect of the Palestinian problem is the PLO." This official said Arafat's crime against the Palestinian people has been his claim that he represents a Palestinian "revolution" outside the country, where no revolution can exist because it is not tied to the land.

"The reason the West Bankers all say hail to Abu Ammar {Arafat's nom de guerre} is that he has relieved them of their historical obligation to resist the occupation," he said.

A former PLO executive committee member, Hana Nasir, however, voiced what is still the most common Palestinian sentiment: "We all share moments of despair about its failures. We are loyal to the PLO not because we are stooges, but because this is our structure; it's like the United States with President Reagan: You may criticize him, but for better or worse, this is your country."

The competition for Palestinian loyalty in the occupied territories has put tremendous strains on local leaders, who, by their daily contacts and associations, run the risk of expulsion, assassination by rivals and accusations of collaboration.

"Nobody wants leaders in the occupied territories," said Mahdi Abdul-Hadi, lawyer and founder of the Arab Thought Forum in Jerusalem.

"The Jordanians want employes and not partners; Arafat wants followers, but not colleagues; and Israel wants collaborators and not equals with independence and self-esteem," Abdul-Hadi said.

As the years have passed, the political, economic and social impact of living under occupation has been studied by a variety of scholars.

Kerry Abbott, a doctoral candidate at the London School of Economics who has spent five years studying the conflict, said she finds Palestinians deeply cynical about their plight, self-absorbed with their lives and problems and virtually incapable of organizing an internal opposition to Israel's rule.

"People here aren't revolutionaries," Abbott said. "It's really easy for people here to end up fighting each other."

As for their loyalty to Arab leaders espousing their cause, Abbott said, "I think the Palestinians favor whoever is winning."

Palestinian youth learn the rhetoric of resistance at an early age and are spurred to acts of random defiance during their impressionable years, Abbott said. "I think they listen to the radio and hear Arafat and think it's a call to them," she said.

However, countervailing pressures to finish school and support a family are the greatest moderators to organized resistance, she added.

"People are stuck with a pattern of life that leads to marriage and work and they may talk politics, but life is hard enough," she said.

A number of Palestinian leaders have expressed growing concern that the "occupation generation," young Palestinians who were born after 1967, are much more prone to violence and what Abbott called "anarchist" behavior.

Hatem Abu Ghazaleh, a Cambridge-trained surgeon who operates a center for handicapped children in Gaza, said, "This is a generation that has been brought up with absolutely no chance for equal opportunity in anything . . . and there is nothing really for this generation that would give them confidence in the {Palestinian} community."

Abu Ghazaleh said that as a result, youthful camp dwellers distrust the traditional Palestinian institutions, family and community.

As one adviser to Hussein put it, the "occupation generation" grew up after the awe at the Israeli military feats of 1967. To this generation, the Israeli soldier on the street corner is no longer larger than life. "He is only the enemy, and that makes a difference." Pressures and Punishments

The statistics of the occupation suggest a harsh environment for Palestinian youth: 250,000 Palestinians have been in Israeli prisons during their lifetimes; 1,215 have been deported or expelled; and 1,300 homes have been bulldozed as part of collective punishments imposed by the Israelis for acts of terror.

Last week in Gaza, dozens of Palestinian fishing boats could be seen beached, forbidden to engage in active commerce until six Palestinians who escaped from prison were apprehended.

At the same time, the Israeli occupation authority had reduced to a trickle the number of Gazan trucks allowed to take their produce and citrus to markets in Jordan because a cache of dynamite had been found concealed in one of the trucks.

Said Bir Zeit University professor Sari Nusseibah, "There is a great psychological burden on Palestinians in the territories. Even I have nightmares of police and military pursuing me.

"Inside our psyche," he continued, "the soldier represents the embodiment of oppression and what the kids try to do is liberate themselves. I think it is a kind of exorcism to throw a stone at Satan."

New forms of youthful violence -- including Molotov cocktails and stabbings -- have concerned Israeli authorities and outraged settlers and some vigilante groups who advocate taking the law into their own hands to retaliate.

Last week, settlers and Palestinians appeared braced for revenge attacks after a 10-year-old Israeli was found dead in a cave outside his kibbutz. A bloody stone used to strike a fatal blow to his skull was also found in the cave.

The confrontation over land confiscation and settlement in the territories taps perhaps the deepest emotions and resentments on both sides.

"People have lost incredible amounts of land," said Nasir, the former PLO executive committee member who is also a former president of Bir Zeit. "Lots of people have gone berserk. This is a nation that for the last 40 years has stopped doing any creative work, because when Palestinians get together, this is all they talk about."

The passage of time and the escalating cycle of violence have prompted some Palestinian leaders to call for new tactics.

One such tactic, advocated by Bir Zeit's Nusseibah, is to "move from total rejection of the {Israeli} system to slowly getting into the system and making use of it." Nusseibah argues that many Palestinians unconsciously have immersed themselves in Israel's economy and legal structure and, therefore, look for remedies to grievances there.

He cited as an example a demonstration in Jericho recently in which Palestinian farmers demanded equal access to Israeli markets.

"They were not asking for the walls to be rebuilt, they were asking for the walls to be totally eradicated," he said.

Other Palestinians have petitioned Israeli courts to fight deportation orders or land confiscation by Israeli settlers.

Under Nusseibah's prescription, Palestinians should demand annexation of the West Bank and Gaza and then petition Israeli courts for full rights of citizenship in which the strength of the Palestinian birth rate would instantly make the Arab population a major political force in the country.

Skeptics see Nusseibah's plan as at best a gimmick, but one that illustrates a growing assertion of rights by Palestinians under Israel's legal code.

Another recent tactic has been nonviolent resistance to settlers.

"This is the only thing the Israelis concede could work," said Abbott. "Now they {Palestinian resisters} are actually pulling down fences and when the settlers come, they tell them, 'You can call the Army and shoot us, but when people hear about it, they will know you are murderers.' "

But Abbott and others don't see nonviolence catching on. "You'll never have a Palestinian Gandhi," said one expert. "It's not in Islam to be that passive."

A more practical, and, thus far, more effective, strategy for resistance has been undertaken by the surgeon in Gaza who built his school for the handicapped by ignoring occupation rules and regulations.

"I fight them by my brains," said Abu Ghazaleh. "I have developed a constituency inside the Israeli system -- professors at Hebrew University, politicians in the Knesset." He brags that his center is the only Palestinian institution licensed by the U.S. government as a private voluntary organization eligible for U.S. aid dollars.

"The Israelis don't like me," Abu Ghazaleh said. "I stand up to them on every issue."

He said he is currently locked in a struggle with the occupation authority over the establishment of a vocational rehabilitation center for handicapped adults.

"For the last two years I have been asking for one acre of land," Abu Ghazaleh said, adding that an American donor already has pledged the needed funds.

Israel, in recent years, has claimed large tracts of land in Gaza to build settlements. But Abu Ghazaleh said he believes opposition to his programs stems more from a recognition by Israeli authorities that social infrastructure is part of nation-building.