NEWS ANALYSIS : Mideast Violence Leaves Peace Quest at Crossroads : Terror: Israelis, in shock, wonder if it’s safe to proceed. PLO fears a crackdown on radicals could trip civil war.

With two devastating attacks in the heart of Israel last week, Islamic militants have thrown into serious doubt the course of Middle East peace negotiations, forcing Israel and its Arab partners into a hard reassessment.

Israelis--horrified by the abduction and killing of a young soldier and by the murderous attack earlier on a popular cafe district in Jerusalem--are asking themselves whether it is safe to proceed if this is the result of the tentative peace with the Palestinians.

Even supporters of peace with the Palestinians find it difficult to argue that the pace should be faster, not slower, to deny the radicals time and space to strike again.

The Palestine Liberation Organization, held accountable by Prime Minister Yitzhak Rabin for the terrorist upsurge by the Islamists, is confronted with a need to crack down on the radicals--but not at the cost of a civil conflict that could quickly engulf all of the Palestinian territories.

PLO Chairman Yasser Arafat, who has carefully encouraged the moderation of Hamas, the largest Islamic group, now sees it pulled back toward radicalism.

Neighboring Arab states, notably Syria, must worry about a sharp diminution in Israel’s will to make peace, about an understandable preference among many here for the security they have known through the strength of arms. What price must the Arabs then pay to engage and reassure Israel?

And the Islamic militants themselves, while exulting in the success of their two latest attacks, must consider whether to attempt to frustrate the peacemaking process totally, as they have wanted, and risk being crushed by Israel and the PLO, or to settle for a place within a future Palestinian government.

“We are very much in danger of losing our bearings through events like those of the past week,” said Ziad abu Zayyad, a PLO activist in Jerusalem. “Emotions take over. Worst-case scenarios somehow become real. When they kidnaped that soldier, they tried to kidnap the peace process and hold it hostage. Let us hope peace did not die when he was killed. . . .

“All of us--Palestinians, Israelis, Syrians, Jordanians, Lebanese--are at the mercy of the radicals, those who are willing to offer their lives and to take the lives of others to make up for their lack of popular support,” he added. “This is no less true of Israelis than it is of Palestinians. None of us has escaped from the extremists.”

Although two bus station bombings by Hamas in the spring and a massacre by an Israeli settler at a West Bank mosque caused many more Israeli and Palestinian casualties, the two attacks last week by the Islamic Resistance Movement, as Hamas is formally known, dramatized for both Israelis and Palestinians the dangers they face in pursuing peaceful coexistence.

“Upon reflection, I doubt that our people will want to reverse course,” a senior Israeli official said Saturday, “nor even to slow the process. But we all want reassurance because, frankly, we are nervous because of what has happened.”

Last Sunday evening, Hamas gunmen attacked Jerusalem’s popular cafe district, opening fire with automatic rifles and hurling grenades. Two people were fatally wounded before police and soldiers killed the attackers.

The same evening, other Hamas guerrillas abducted Cpl. Nachshon Waxman, 19, near Tel Aviv and demanded that Israeli authorities release 200 prisoners from radical Palestinian groups and meet other demands in return for his freedom. On Friday, Waxman, three of his captors and an Israeli commando died in an abortive rescue attempt in an Arab village just outside Jerusalem.

“They have hit us hard and they have hurt us badly,” another Israeli official said. “Any attack, particularly any death, resonates through the whole country. That these attacks occurred when and where they did, and despite all of our security, just deepens the sorrow and the anger.”

This is what has put the joint Israeli and Palestinian search for peace at a crossroads: Each side expected much more of the other than it has delivered, possibly more than it can deliver; each consequently faces the hard decision of whether, how and at what pace to proceed.

For the Israelis, the goal of peacemaking has been to enhance long-term security; for the Palestinians, self-rule and the hope of independence.

The aims of both now appear to be further away.

As Rabin and other Israeli leaders made clear this weekend, they expected that the PLO would deal with Palestinian radicals--the main threat to the peace process--as part of the agreement on self-government. That Hamas’ latest attacks occurred inside Israel did not matter, Rabin argued, for the radicals’ headquarters was in the Gaza Strip, which the PLO controls.

So certain was Rabin that Waxman had been taken to “a Hamas dungeon in Gaza” that he held Arafat “personally responsible” for the soldier’s fate, closed the Gaza Strip and applied further pressure through the United States and Egypt.

When Waxman was found in the Israeli-occupied West Bank, less than two miles from his parents’ home in northern Jerusalem, Rabin still asserted that Hamas was a Palestinian responsibility, declaring that the operation had been ordered and planned in the Gaza Strip.

But Arafat’s initial moves against Hamas--massive police sweeps of the Gaza Strip, the roundup of more than 300 Hamas members and on Saturday an order to disarm its military wing--brought threats from the group to “set Gaza ablaze” with protests against the PLO and the Palestinian Authority.

At the same time, the Palestinian Authority has won few gains in the continuing negotiations with Israel--little to show its many critics that the year-old accord on self-government was worth the compromises involved.

Palestinian officials quickly tick off the outstanding issues: the release of almost 5,000 prisoners still held by Israel, national elections envisioned in the agreement on self-government, redeployment of Israeli forces out of West Bank towns and villages, expansion of the Palestinian Authority in the West Bank.

“The peace process is based essentially on trust, and that trust has been lost to the point where each side expects the worst of all the others,” said Dr. Ahmed Tibi, a Jerusalem physician who advises Arafat on relations with Israel and who attempted to mediate the kidnaping crisis last week. “An effort will have to be made to get beyond all this and to rebuild that trust.”

The first moves, Palestinian officials said, should be the lifting of the closure of the Gaza Strip that Rabin imposed after Waxman’s abduction and immediate resumption of negotiations on Palestinian elections.

“The negotiations should not be used as a weapon whenever an incident occurs--it will jeopardize the relations between both sides,” Palestinian Information Minister Yasser Abed-Rabbo said in Gaza City. “It’s important to regain the momentum we lost in the past weeks, to get down the road.”

Rabin, while acknowledging that his harsh demands upon Arafat were “not valid” because Waxman was not in Gaza, said it is “not so simple” to return to the negotiations. Israel, he implied, would want to reach an understanding with the PLO on control of Hamas.

“Gaza has become a fertile ground for the activities of Hamas, not only within the Gaza Strip but beyond,” Rabin said, demanding that the Palestinian Authority succeed where the Israeli occupation failed.

Arafat, he added, “cannot have peace with Israel and peace with Hamas.”