JERUSALEM, AUG. 9 -- Hanna Siniora, a well-known Palestinian newspaper editor from east Jerusalem, has managed the rare feat of outraging both Arabs and Israelis.

Since Siniora proposed in June that he run for the Israeli city council here at the head of a Palestinian slate, right-wing Israelis have called for legislation to stop him and hard-line Palestinians have burned his cars and labeled him a traitor to their nationalist cause.

With his proposal, Siniora has managed to threaten both sides in the Palestinian-Israeli conflict by proclaiming a thesis that neither wants to hear.

The Palestinian population within Israeli-controlled territory is growing faster than the Jewish Israeli population, Siniora notes. There are already 1.4 million Palestinians in the Israeli-occupied West Bank and Gaza Strip, about 700,000 Arabs in Israel proper and about 135,000 Arabs in east Jerusalem.

Siniora proposes that Palestinians use their numbers to change Israel's system from within as well as resisting it from without. He believes that gaining Arab minority rights by running for and gaining representation in the Jerusalem city council is an idea whose time has come.

A few Palestinian intellectuals, including Siniora, suggest that the growing Arab population in the lands occupied by Israel 20 years ago -- and a gradual economic integration of the occupied territories with Israel -- may offer Palestinians a new political model for their struggle against Israeli authority.

Siniora and others compare the Palestinians' situation to that of South Africa's blacks. They say that as a result of Israel's continuing occupation, the West Bank and the Gaza Strip have become economically dependent on the neighboring state of Israel in the same way that South Africa's tribal homelands depend on white-minority-ruled South Africa.

In June, Siniora suggested acting on the thesis by mounting a Palestinian ticket for municipal elections here in the fall of 1988. He argued that the city's Palestinians, who number 135,000 of Jerusalem's 479,000 residents, could win enough seats on the city council to at least act as power brokers, much as Israel's small religious parties do in the Knesset, or parliament.

The suggestion scandalized Palestinians, for whom a boycott of all political relationships with Israel has been at the core of their claim for a separate state. Siniora's own newspaper, the daily Al Fajr, editorialized stiffly that "many questions must be debated before we can decide whether or not to support the idea."

The Palestine Liberation Organization leadership, based in Tunis, rejected Siniora's move as a "personal decision."

The angry reactions, including the burning of his cars, underline the hazards of attempting moderate or pragmatic initiatives amid the bitter emotions of this conflict.

The Palestinian outcry was loud enough to force Siniora into a brief retreat. He announced he would seek legal opinions from a number of lawyers and drop his idea if they found that his candidacy would imply acceptance of Israel's unilateral annexation of east Jerusalem following the 1967 Six-Day War. In an interview this weekend, Siniora said he expects to receive the legal opinions by the end of September.

Siniora said election of Palestinian officeholders in Jerusalem could be a first step toward a settlement on the future of the city. Siniora envisions a Jerusalem of "dual sovereignty," straddling an open border between Israel and an independent Palestine, but with a single, joint city council.

Arabs in East Jerusalem have a different status from other Arabs who reside in Israel. They are allowed to vote in municipal elections, although very few of them do, but are not allowed to vote in national Israeli elections. They are not Israeli citizens, as are those who live within Israel's pre-1967 war borders.

Siniora said he wants to act because "there is not going to be any outside input" into resolving the Palestinian issue for two to three years. He discounted any hope for progress toward a Middle East peace settlement while Israeli Prime Minister Yitzhak Shamir remains in office and while the United States moves toward a presidential election in which, he said, "the candidates will be outpromising each other on support for Israel."

But, he concedes, there is "stiff opposition" to his plan, and that, according to others, is a polite way of putting it.

Siniora -- who came to international attention in 1985 when he was named as one of two PLO-approved members of a joint Palestinian-Jordanian team for would-be peace talks with Israel -- is now widely criticized for being isolated from his community.

"He is not representative of anyone," said Bassam Shakaa, the former elected mayor of the West Bank city of Nablus. "He cannot make this decision respectable in the eyes of the Palestinian people."

Even the theoretician behind Siniora's move has said it is badly conceived and ill-timed.

Sari Nuseibeh, a philosophy professor at the West Bank's Bir Zeit University, argues that Palestinians are slowly adapting and integrating themselves into Israeli society: taking jobs or training programs in Israel, collecting Israeli social security and appealing for justice to Israeli courts.

Nuseibeh said in an interview this weekend that Palestinians, disenchanted with their inability to win independence, are moving -- slowly -- toward the point where they will be ready to change tactics. Instead of fighting to liberate territories from Israeli control to allow establishment of a separate Palestinian state, Nuseibeh suggests, Palestinians may opt to fight for political rights within Israel, shifting their goal to an idea favored by many at the time of Israel's establishment: a secular, binational state for both Israeli Jews and Palestinian Arabs.

But for now, Nuseibeh said, Palestinians remain wedded to the goal of an independent state. The threat of a campaign for political rights within Israel is a tactic to be brandished at Israel rather than adopted immediately, he said.

Nuseibeh said this weekend that a positive effect of Siniora's electoral bid is that it "raises the consciousness in Israeli society about the possible evolution of their country into a binational state."

With an appeal that Siniora not be dismissed out of hand by his own people, Palestinian journalist Rami Khouri wrote in the Jordan Times that Siniora's move "is a challenge to all concerned."

He went on: "To Israelis, it represents a threat they have tried to avoid. . . of having to absorb over a million Palestinians and give them political rights.

"To the Palestinians themselves and the PLO, it represents the specter of total defeat, of abandoning the dream of a Palestinian state."

The threat felt by Israelis has been underlined by calls from right-wing politicians to prevent non-Israeli citizens from running for office. Like virtually all east Jerusalem Arabs, Siniora refused the offer of Israeli citizenship that came with the annexation of that part of the city. Most are formally Jordanian citizens.

Siniora also faces imprisonment or deportation by the Israeli government over complaints by right-wing Jews about his support for the Palestine Liberation Organization. Police Minister Haim Bar-Lev told the Knesset last week that he had prepared charges against Siniora for having published an interview with PLO leader Yasser Arafat and for having a picture of Arafat in an office of the newspaper, where it was filmed by an Israeli TV crew that interviewed Siniora.

The independent Hebrew daily Haaretz today accused the government of pursuing Siniora out of political expediency.

"Siniora is not a terrorist," the newspaper said. "He is an important candidate for possible future rapprochement between Israelis and Palestinians."

Elyakim Haetzni, a lawyer and leader in Gush Emunim, the right-wing Jewish movement for settlement of the West Bank, filed the complaints against Siniora and has taken the government to court to force it to prosecute him. Haetzni lobbied for a law, under which he is now pursuing Siniora, that outlaws "any public act of identity" or sympathy with terrorists.

Haetzni rejects any bid for political office by Palestinians who express sympathy for the PLO. Siniora, he said in a telephone interview, "is the unaccredited ambassador of Yasser Arafat."

Palestinians who sympathize with the PLO should be deported to Jordan, Haetzni said. adding, "Siniora should have been out long ago."

Siniora has understood the hazards of the Middle Eastern maelstrom into which he has slipped over the years. A pharmacist who had earlier studied engineering in California, Siniora took time out from running his pharmacy to edit Al Fajr after the former editor, his brother-in-law, disappeared mysteriously in 1974.

"I feel the pressure," he said, noting especially the burning of his cars. He recalled several assassinations of Palestinian moderates over the past decade, who, he said "paid the blood price of trying to bring a political solution.

"I take my own precautions," he said. "ut I believe people must work hard for their beliefs. I am working hard."