An Israeli boy out riding his bicycle takes a wrong turn, gets a flat tire and winds up stuck in a Palestinian neighborhood. There, behind a wall, he spots . . . a couple of shaggy Muppets.

Happily, this is Middle Eastern "Sesame Street," where Jews and Arabs are on friendly terms even though they live on separate streets. So the Palestinian Muppets get to work replacing the tire. Stereotypes are shattered, everyone smiles and all ends well.

Or does it?

"When we interviewed Palestinian preschool teachers, they were angry about the segment," said Cairo Arafat, an expert on preschool education here. "They said, 'The Israelis have taken everything from us--our homes, our land--and now we're giving them a bicycle wheel?' "

The concept of intersecting Israeli and Palestinian "Sesame Streets" was born four years ago-- after the 1993 Oslo peace agreement --and from the outset it has been the most politically charged of the world's 20 national versions of the show. In unmistakable ways, the currents of discord and mutual suspicion surrounding the show have mirrored the ups and downs of peacemaking in the region.

Now the peace process itself stands at a crossroads, and so does the co-production of "Rechov Sumsum" (as the show is known in Hebrew) and "Sharaa Simsim" (as it is known in Arabic). The project's leaders must decide whether to go forward with a new season, launch a new fund-raising drive and produce fresh segments of a project still infused with hope but tangled by its own contradictions.

Not only do the Israeli and Palestinian Muppets live on separate streets, but their producers have radically different ideas about how they should meet and interact. The Israelis wanted lots of integrated activities--by mutual consent, of course. The Palestinians said thanks but no thanks--until the Israelis end their occupation of Arab lands.

"We asked ourselves, are we producing 'Mission Impossible' or 'Sesame Street'?" said Lewis Bernstein of Children's Television Workshop in New York, project director for the Israeli-Palestinian co-production.

"Sesame Street" is celebrating its 30th birthday, and its international success as a pioneer in children's educational television is legendary. The show, either dubbed or in home-grown versions, is aired in some 120 countries, and it has proven highly adaptable to diverse cultures.

In Russia, the program features poetry by Mikhail Lermontov set to music and a seven-foot-tall creature decked out in blue feathers and a stupendous orange nose named Zeliboba. In China, where the Muppets adore opera and revere their philosopher ancestors, the local producers toyed with substituting a panda for Big Bird before finally settling on the original.

But nowhere have the producers faced a messier and more contentious political landscape than in the Middle East, where it sometimes seems the role model for intercommunity relations is Oscar the Grouch.

Jockeying over the $5 million program began at the outset, when the Israeli and Palestinian production teams signed separate deals with the New York-based parent company, rather than with each other. The two would have their own producers and writers--even though the Palestinians had no production studio and little expertise in animation, puppets or writing scripts for preschoolers.

Then, just as production was starting, the Middle East suffered one of its periodic paroxysms of violence. In 1995, on the eve of the first meeting between the two sides to plan a curriculum, Yitzhak Rabin, the Israeli prime minister, was assassinated. On another occasion, a fashionable Tel Aviv cafe was bombed by Palestinian terrorists just as a taping session was to begin.

Against that backdrop of bloodshed, the show went on, but with some trepidation.

"Early on," said Bernstein, "an Israeli asked, 'What if you created a show where [Israeli and Palestinian] children were singing and dancing together, and there was a bus bombing the same day?' "

Amid much fanfare, the show began airing last year, the Israeli program in Hebrew and the Palestinian one in Arabic. Some elements are traditional "Sesame Street" fare: Both sides, in their own languages, teach the traditional curriculum of colors, letters, numbers and vocabulary.

But the characters live separate lives on separate streets--the Israelis on a boardwalk with a view of the Mediterranean, the Palestinians with a sweet shop and a landscape of arid hills and olive trees. When the two meet, it is in "crossover" segments in which cast members from each street visit the other--usually by invitation.

Many of the skits are designed to break down stereotypes in a region where each side tends to see the other as a violent and menacing adversary. Israeli and Palestinian characters are amazed to see each other eat such traditional Arab dishes as falafel and hummus. Both learn to count in the other's language. In one segment, a Palestinian girl is shown working on a computer; in another, a Palestinian Muppet buys a book in an Israeli store.

On both sides, the emphasis is on treating people in the other group as individuals. The show has shied away from dealing with national symbols: Mosques and synagogues, holidays and holy places are ignored.

"The aim is not a sea change, the aim is to get each to accept the other," said Daoud Kuttab, executive producer of the Palestinian show. "We're just trying to get them to understand there is something else."

As in the peace process itself, the two sides call each other partners, but much of the tension between them sprang from the Palestinians' perception that they were by far the weaker and less advantaged of the two.

Not even the Muppets were exempt. The Palestinian producers were determined to match the Israeli show's equivalent of Big Bird: Kippi, a lumbering purple porcupine whose prickly personality conceals a heart of gold. When they settled on Kareem, a proud but amiable rooster, some Palestinians complained that Kareem, a hand-held puppet, was a fraction of the size of Kippi, who is played by a human in a costume. After much hand-wringing, the Palestinians decided to keep Kareem as he was, for the simple reason that he was easier to deal with.

"The Americans and Israelis are much more excited about producing the impression that everything's okay and that we're living in peace," said Kuttab, the Palestinian producer. "The Arab side wants to see results."

Those competing visions have translated into real differences in what kids on each side see on television. The Israeli show, 30 minutes daily, virtually always includes several minutes of a crossover segment, in which the Palestinian characters speak Arabic and the Israeli kids speak Hebrew. The Palestinian show, 15 minutes three times a week, airs fewer crossover segments and comparatively little in Hebrew.

The shows are widely watched in Israel and the West Bank, but political tensions have kept it off screens in the other Palestinian-ruled territory, the Gaza Strip.

Polls showed that Palestinian children as young as 4 described Jews as violent aggressors who shoot, kill and beat Palestinians. Many Jewish children had negative images of Palestinians, whom they described as dirty and territorially aggressive.

In both groups, surveys showed children who watched the program for a few months had more positive images of the other group. But the change appeared to be more dramatic among Israeli children; although Palestinians had more positive things to say about Israelis, they still had plenty of negative ideas, too.

Heartened by the results, "Sesame Street" producers are thinking hard about another season. But neither is under the illusion it will be much easier than the first.

CAPTION: Kippi, the purple porcupine in the Israeli "Sesame Street," aroused resentment by being bigger than Kareem, the Palestinian rooster.

CAPTION: The Muppets of "Sesame Street" vary in the 120 countries where the show airs. In Russia, Zeliboba sports blue feathers and a big orange nose.