LOD, ISRAEL -- -- For nearly 40 years, Arabs and Jews have lived alongside each other in tranquility in this central Israeli city 10 miles southeast of Tel Aviv. They have frequented each other's shops, gone to the same hospitals and clinics, rooted for the same soccer teams.

Then came last week.

Israeli Arab leaders called a general strike that Monday to express solidarity with their Palestinian brethren in the occupied West Bank and Gaza Strip, where at least 21 were killed during two weeks of civil violence, and virtually all of the 8,000 Arabs of Lod responded. They boycotted their jobs and schools, they held a memorial service at the central mosque here and, afterward, some of them set up makeshift barricades of rocks and burning tires and pelted police with stones. There were 21 arrests.

It was, by West Bank or Gaza standards, a minor flareup. No one opened fire and no one died, either here or in dozens of other Arab communities.

But the almost total adherence to the strike among the country's 750,000 Arab citizens, the scattered violence and the chanting of Palestinian nationalist slogans -- and, in one well-publicized instance in Nazareth, of "Death to the Jews" -- stunned and angered Israel's leadership. It shook the Jewish majority that generally has viewed its Arab citizens as quiescent and reasonably satisfied junior partners in the Jewish state.

"I never wanted to believe that this could happen," Prime Minister Yitzhak Shamir told Israeli television, "because I am interested in coexistence. But it lit a red light, a red light for many Israelis. Our Arab citizens must know and remember this: they must see the slope toward which they are sliding."

But Israeli Arabs themselves, and the Jewish academics who have studied their communities, say no one should have been surprised by their actions. "Last Monday was a milestone in a continuing process," said Eli Reches, a social scientist who specializes in Israeli Arab affairs at Tel Aviv University's Dayan Center. "It's been building for years."

Israel's Arabs have been undergoing a collective identity crisis for the 39 years since the founding of the Jewish state. They are Israelis with citizenship rights that, at least on paper, are equal to those of the Jewish majority. At the same time, they are Palestinians who identify with their brethren in the occupied territories and in the Arab world. It is an uneasy duality and a source of endless tension inside their communities and in their relations with their Jewish neighbors.

"We are here, and we are there," said Amneh, 49, a Palestinian resident of Neve Yerek, an Arab neighborhood in Lod. She participated in the Dec. 21 march from the mosque, and her 22-year-old daughter was arrested and held for several hours by police.

"We don't want to destroy the state of Israel, but we are also Palestinians," she said. "When someone in your house dies, all the neighbors come to mourn, and they were dying in Gaza every day."

When Israel gained independence in 1948, an estimated 700,000 Arabs lived within what became its borders. Most fled during the independence war but official data on how many left voluntarily and how many were expelled by the Army are still subject to military censorship. The remnant -- about 156,000 Arabs -- has grown into a sizable minority that now makes up about 17 percent of Israel's population and is growing at a rate nearly twice that of its Jewish neighbors.

During the early years of the state, Israeli Arabs were regarded with distrust by Israeli Jews. Large sections of the Galilee region, where the majority of them live, were kept under military law until 1966. Some who were evicted from their land are still fighting in court and in the government to get it back. They were segregated from Jews by religion, language, schools and culture.

Some of the separation was voluntary, some of it imposed. Unlike Jews, Israeli Arabs were not required to serve in the Army and those who volunteered were subject to strict security checks. Those same checks are made of Arabs seeking employment in the public school system or in defense industries.

Educational and economic opportunities have risen markedly over 40 years -- a process known as "Israelization" -- and officials contend that Israeli Arabs are better off economically and enjoy far more legal and political rights than their brethren in much of the Arab world. Many Israeli Arabs concede the point, but measure themselves against Israeli Jews and see themselves as distinctly second-class citizens who suffer discrimination in all fields.

The transformation of their political consciousness began after the 1967 Arab-Israeli War and Israel's capture of the West Bank and Gaza. Suddenly the long isolation of Israeli Arabs was over and contact was possible with 1.3 million Arabs across the "Green Line" -- Israel's original border. A new process, "Palestinization," began that for many Israeli Arabs included identification with the outlawed Palestine Liberation Organization.

The result can be seen in many homes in Arab villages such as Umm Fahm and Kfar Kassem in central Israel. Some have pictures of PLO Chairman Yasser Arafat on their walls. Others have caught the wave of Islamic fundamentalism sweeping in from Lebanon on one end and the Gaza Strip on the other and have covered their walls with Koranic verses and other symbols of worship.

"I go to Tel Aviv and I can see it in their eyes -- they don't look at me as a man," said Badir Mohammed Faik, a young engineering graduate from Kfar Kassem, describing the sense of inferiority he feels inside Israel. "We would love to have a secular state, but the Jews are much too strong and we are too weak. So we ask for the minimum we can get: equal rights in Israel."

Shamir's rightist Likud political bloc has helped speed the radicalization of Israel's Arabs during its term in office. The government encouraged Jewish settlement in the West Bank and Gaza, arguing that all the territories were a permanent part of the biblical land of Israel. In blurring the distinctions between the two areas, the Likud also blurred the distinction between Palestinians living in Israel and those living under occupation.

"When Israel effectively erased the Green Line, it was almost inevitable that Israeli Arabs would follow suit," says Yehuda Litani, a Jerusalem Post journalist and veteran commentator on Arab affairs.

Experts say the size and vehemence of last week's general strike was a blend of two elements for Israeli Arabs: genuine sympathy for Palestinians across the Green Line coupled with anger and frustration over their own status inside Israel.

The government, which many analysts contend once preferred to ignore Israeli Arabs, has taken their presence and complaints more seriously in recent years. The 1984 coalition government between Likud and the more dovish Labor Party for the first time designated a Cabinet minister to oversee Israeli Arab affairs.

During the premiership of Labor's Shimon Peres, the post went to Ezer Weizman, a well-known dove who tirelessly wooed Israel's Arabs. When Shamir took over, the post went to Moshe Arens, who despite a reputation as a hard-liner made a strong attempt to match Weizman's efforts and even devised a controversial plan to return farmland in the Upper Galilee to two disinherited Arab villages.

The main reason was simple politics. With Labor and Likud running at almost a dead heat in the polls, both sides need voters and Israeli Arabs have the potential to elect as many as 15 of the Knesset's 120 members. About 60 percent support one of two small, non-Zionist, left-wing parties, the Democratic Front for Peace and Equality and the Progressive List for Peace. The votes of the others are considered up for grabs.

But the political wooing by Labor and Likud came to an abrupt halt Dec. 21, when leaders of both blocs reacted with anger, dismay and not-so-subtle threats.

Defense Minister Yitzhak Rabin, a Laborite, told Arabs in a Knesset speech, "You were and are a part of us. . . . Permit me to propose to you not to be dragged after incitement, not to be tempted by calls to do harm and to demonstrate, and to remain as you have been until now: loyal and leading a tranquil life."

Then Rabin added a warning that many Arabs interpreted as a veiled reference to the population flight of 1948 in which, as a young commander in the Jewish forces, he played a role: "In the remote past you knew a tragedy, and it will be best for you and for us if you do not revert to it or repeat it."

Shamir, incensed at the cries of "Death to the Jews," said Israeli Arabs had to choose between the PLO and Israel.

"Suddenly you see this kind of eruption of hatred, of revulsion, of readiness to destroy, to kill, to block roads," he said. "I hope that they will continue to follow the road of loyal citizenship and of peaceful coexistence. This is what we want. If they do not want to, there will be dire consequences."

In Lod, Jewish city officials are not so quick to sound alarm bells. Municipal spokesman Jacques Shitrit says the violence was minor and carried out only by children. All of those arrested were released after a few hours without charge. There will be special meetings at the Arab high school and at city hall, but few other ramifications, he said.

"The truth is that we were very surprised because this had never, never happened before," said Shitrit. "We've always believed the situation here is the best situation between Arabs and Jews in the entire Middle East."

Arabs are less sanguine. Amneh and her daughter Dunyah, a school teacher who did not want their family name used for fear of reprisals, contend discrimination is a way of life here. Their grievances are those of rising expectations, of middle-class people who live in a comfortable house and who, having been granted some economic and political freedoms, now insist on having more.

Dunyah said Arabs who did report for class at her elementary school in Beersheba Dec. 21 faced dismissal. Amneh said her husband, who works in a packing plant in Lod, has long been bypassed for promotions that went to less-experienced Jewish employes.

Other Israeli Arabs are less inclined to complain. In Abu Ghosh, a bedroom community of Jerusalem where most Arabs ignored last week's strike despite the fact that some schoolchildren took the opportunity to stone cars owned by Jews, many residents expressed a strong sense of identification with Israel. One man, who served in the Army, said he supported the rightist Likud and a get-tough policy in the occupied territories. He even took out and kissed his Israeli identification card to make clear his allegiance.

But even in Abu Ghosh, some say their loyalty stems more from pragmatism than from any great love for Israel.

"Listen, I am whatever time tells me," said one man who refused to be identified. He glanced at his wristwatch and said, "Today at 10:35 I'm an Israeli. Tomorrow if the Jordanians come and give me a Jordanian identity card, I become a Jordanian."