The shrine to Iris Azulai sits on her parents' living room console: a tiny oil-burning candle that has been kept lit, day and night, for nine years; a bronze plaque from her commanding officer in the army, praising her beauty and talent; and a photograph of a young woman with blue eyes, auburn hair and a bright smile.

Azulai, a 19-year-old Israeli soldier, was stabbed to death in Jerusalem by a Palestinian teenager who came racing down the street early one morning on a murderous rampage. Wielding a 16-inch bayonet, he plunged the blade into Azulai, who had just stepped out of her parents' home wearing her khaki uniform but carrying no weapon. He injured a young boy and killed two other men before he was subdued.

The murders took place in 1990. To Azulai's parents -- and to many Israelis -- they might as well have happened yesterday.

The question of releasing Palestinian prisoners from Israeli jails -- terrorists to the Israelis, political prisoners to the Palestinians -- was one of the main hang-ups in the Middle East peace negotiations that took a step forward tonight, and Juliet and Elie Azulai, Iris's parents, make it clear why.

"They deserve to sit in prison until they rot," said Elie Azulai, 73, a retired bank clerk whose fierce opinions and right-wing politics do little to obscure the fact that part of his life ended with his daughter's murder.

Said Juliet Azulai, 64, who still weeps freely at her daughter's memory: "They should have been killed just as they killed. They should never get out of prison."

In only slightly more diplomatic language, the Israeli government made much the same point in peace talks this week. The Palestinians were demanding the release of 400 inmates, particularly those arrested before the 1993 Oslo agreement fueled hopes for a durable peace in the Middle East.

The Israelis insisted 350 was the maximum. To release more, they said, would mean freeing prisoners who had murdered Israelis or belonged to militant groups that advocated the murder of Israelis. That, they insisted, was out of the question.

"This for us is a very strong emotional point," said Ephraim Sneh, Israel's deputy defense minister, who met this week with the bereaved parents of Israelis murdered by Palestinians. "We cannot ignore the agony of these people."

Israeli and Palestinian officials said today that the prisoner dispute is settled -- for now. Israeli sources said the Palestinians agreed to accept the lower number, making it unlikely that Iris Azulai's killer will get out. The Palestinians said the Israelis were bound by previous agreements to release more prisoners in the future. Both sides acknowledged the dispute is likely to surface again, perhaps soon.

For the Palestinians, the question of the remaining prisoners jailed for crimes against Israel -- not all of whom have killed -- is no less emotional. Many Palestinians regard the prisoners as freedom fighters who must be released if there is to be peace. Late last year, the house of a top Palestinian negotiator was stoned by his countrymen when they discovered that most of the 250 prisoners Israel released in one batch were common criminals and car thieves rather than those jailed for political crimes.

As the two sides thrashed out their differences over the issue this week, the Azulais listened and watched in pain. Juliet Azulai left the room when the radio news came on. Elie Azulai winces when he describes the experience of watching the reports of prisoner releases on television.

The Azulais are reluctant to utter the name of their daughter's killer out loud. At its mere mention, Elie leans forward in his chair and is consumed by rage.

"He eats, he drinks. He sees the light, he sees TV. Everything's fine for him -- that's our [government's] policy," said Elie. "And we buried an entire world with our daughter. She could have had children. He murdered a whole chain."

The murderer's name, the name the Azulais will not say, is Omar Abu Sirhan. He was 19 years old, a laborer, when he pulled out his bayonet and began to run down the street. Some witnesses said he yelled "God is great" as he ran. He told police he wanted revenge for the killings of 22 Arabs by Israeli police three weeks earlier in rioting at Jerusalem's Temple Mount.

Barely a month after he committed the murders, a panel of Israeli judges gave Abu Sirhan three life sentences, to be served consecutively to preclude early release, plus 20 years. Victims' relatives tried to attack him in the courtroom. Outside the courthouse, they turned on his family, who had to be rescued by Israeli police.

"Human beings do not have a punishment appropriate for such bestial atrocities," the judges said in handing down their sentence.

To the Azulais, the peace sought by Israel's government is illusory, and they are not prepared to make concessions to achieve it. By turns they are reasonable and furious. Yes, Elie says, there is a distinction between Palestinian prisoners who have committed murder and those who have not. But in the next moment he adopts a harsher tone. As far as he is concerned, he says, all Palestinians are terrorists.

Some months after Iris Azulai's murder, Abu Sirhan's brother was shot by Israeli soldiers when he threw stones at them. Elie saw justice in that, but not enough: He would have preferred for Abu Sirhan's entire family to be expelled from their homes.

"It's almost nine years now, the time goes by so quickly," said Juliet Azulai. "It's nine years that I haven't seen her. I wear her clothes, her undershirts, like she used to wear my old clothes. It's a way to connect. All I have is pictures. It's so sad. . . . I still hear her screams in my ears, in my brain. I'll never stop hearing those screams."