Jerusalem Mayor Teddy Kollek.

EAST JERUSALEM: On a cold, steel-grey morning last November, three West Bank Arab teenagers lunged from the shadows of an alleyway in the Muslim Quarter of the Old City and stabbed to death a Jewish Yeshiva student as he walked to religious school. The Palestinian youths had been rumored to be working as collaborators with Israeli security, and so to prove their nationalist credentials, they killed a Jew.

The murder ignited the worst wave of anti-Arab riots in Jerusalem since Israel captured the West bank from the invading Jordanian army in the 1967 Six Day War. Hundreds of Jews armed with submachine guns and Molotov cocktails swooped down on the Muslim quarter of Jerusalem's old walled city, burning and looting Arab shops and homes, crying "death to the Arabs!" Israel TV captured the terrible image of club-wielding Jewish rioters, many dressed in the long black coats and hats of ultra-Orthodoxy, chasing terrified Arabs through the Old City. At the height of the riots, rabble-rousing Rabbi Meir Kahane, who has a seat in Israel's Knesset, held a press conference, where he called for the creation of a Jewish terrorist underground that would strike fear in the hearts of Israel's Arabs, forcing them to flee for their lives.

Arab East Jerusalem was annexed by Israel soon after the Six Day War. The Israeli government allowed Muslims and Christians to retain control over their holy places and offered East Jerusalem's Arab residents Israeli citizenship as well. Under the enlightened stewardship of Jerusalem's Mayor Teddy Kollek, East Jerusalem remained calm in comparison to the West Bank, where clashes between the local Arabs and ultra-nationalist Jewish settlers and Israeli soldiers were commonplace. During the last several years, however, several radical religious-nationalist Yeshivas established beachheads in the Muslim Quarter of the Old City, shattering the equilibrium between Arab and Jew. The Yeshivas, which are financed by wealthy American Jews and Supported by right-wing Israeli politicians, have begun to purchase Arab real estate with the intention of turning the Old City (including Muslim and Christian holy places) into an exclusively Jewish domain -the prelude, they believe, to the Messianic Age and the Redemption of Mankind. These Yeshivas are not only at the cutting edge of a Jewish fundamentalist revival but also are at the forefront of a powerful right-wing, religious nationalist movement dedicated to annexing the occupied territories and restoring Israel to its ancient glory.

The real prelude to the Redemption, however, may be the apocalypse. Ehud Sprinzak, a specialist on extremist groups at Hebrew University, says Jewish settlement in the Arab Old City could explode into intercommunal violence on the scale and fury of Belfast. "The Yeshivas shouldn't be there," says Sprinzak. Communal violence will increase, he warns, as the Jewish presence there grows.

But because there are no laws prohibiting Jews from buying property in Arab East Jerusalem, there is little the municipality of Jerusalem or the Israeli government can do. "We don't have apartheid in Israel," says Nachum Barnea, the editor of the liberal political weekly Koteret Rashit. "Jews and Arabs for that matter can live wherever they want. Teddy Kollek wants to keep the city ghettoized with people living in their separate religious and ethnic enclaves, but he doesn't have the power to hold the mosaic together anymore."

Between 1936 and 1978, no Jews lived in the Old City's densely populated Muslim quarter -a winding labyrinth of narrow, dank, cobblestone streets crowded with outdoor meat and vegetable markets, and teeming with barefoot children, donkeys laden with produce, and caravans of Western tourists hunting for bargains.

On the first night of Hanukkah in 1978, eight young Orthodox Jews established a Yeshiva in the Muslim Quarter called Ateret Cohanim, the Priestly Crown. The Yeshiva students had come to the Old City to prepare for the last battle -the quintessential struggle between good and evil that will precede the End of Days and the Redemption of Mankind. Specifically, students would study the ancient priestly texts in anticipation of the coming of the Messiah and the rebuilding of the Second Temple, which they are sure is just around the corner. Though the Dome of the Rock Mosque now towers over the ruins of the Second Temple -the holiest site in Judaism, which was destroyed by the Romans two thousand years ago -the students believe that removing the Muslim holy place is just one more obstacle on the path to the Messianic Age.

Matityuhu Hacohen, a strapping, bearded yeshiva student and army veteran who founded the Priestly Crown, was a disciple of the late Rav Zvi Yehuda Kook-the spiritual-ideological leader of Gush Emunim (bloc of faithful), the mystical-messianic West Bank settlement movement. One of Israel's most formidable spokesmen for the retention of the Occupied Territories, Kook encouraged Hacohen to devote himself to Third Temple studies.

Hacohen soon had more on his mind than rebuilding the Temple, however. Why not carry Gush Emunim's holy crusade to settle and build up Judea and Samaria, into East Jerusalem itself? If Judea and Samaria were the heart of the ancient Land of Israel, then Jerusalem and the Temple were its soul. How could the Messiah come to Jerusalem if Jerusalem wasn't an exclusively Jewish city, the likes of which the Prophet Isaiah talked about? "Hacohen became a regular fixture in the halls of the Knesset, lobbying for Jewish settlement in the Old City," says Yisrael Medad, aide to Geula Cohen, the head of the ultra-right-wing Tehiya Party. According to Medad, Hacohen forged particularly close relationships with then Agriculture Minister Ariel Sharon and his chief aide Rafi Eitan, the man who oversaw the Pollard spy operation. At the time, Sharon and Eitan were in charge of the West Bank Jewish settlement program.

In the early 1980's Hacohen and his American colleagues founded the Jerusalem Reclamation Project, an arm of Yeshiva Ateret Cohanim. Its goal is to buy the estimated 1,100 properties in the Muslim Quarter. "We will not employ fanaticism to embrace (our) vision," says an internal Ateret Cohanim document. "That is why it is a difficult goal to carry out -because we must move carefully and cautiously...every piece of property we buy cements our ties to the heart of Jerusalem. Every new (Jewish) family that moves into a redeemed house means an Arab family of larger numbers has willingly consented to move…"

But as Jews began to expand their presence among the 20,000 Arabs in the Muslim Quarter, tension flared. The opening of three new yeshiva several years ago further strained relations. Shuvu Banim, a cult-like congregation that studies the teachings of Nahman of Bratslav, a 19th century Hasidic mystic, has been a particular source of problems. Made up of a strange brew of ex-criminals and drug addicts, the students have been accused of using arson and other strong arm tactics to drive out their Arab neighbors, according to Jerusalem city officials. Meanwhile, a handful of Jewish extremist groups began to agitate for the right to pray on the Temple Mount, the site of the Second Temple where the Dome of the Rock now stands. More ominously, Israeli police recently uncovered several plots by Jewish extremists to blow up the Dome of the Rock Mosque. Even students at Ateret Cohanim have become embroiled in violent clashes with local Arabs. In 1982, for example, Ateret Cohanim students began to tunnel under the Temple Mount in search of a chamber where King Solomon is thought to have hidden many of the gold vessels used in the First Temple. Arab guards at the Dome of the Rock heard the digging, and in the ensuing riot, the Israeli police had the tunnel permanently seated.

Currently, Ateret Cohanim reportedly owns more than 70 buildings in the Muslim Quarter, worth an estimated $10 million. The property includes their yeshiva, the building that houses Yeshiva Shuvu Banim, several dormitories, a museum, and about 50 apartment units. Some of the property once belonged to Jews who lived in the Muslim Quarter before they were driven out by pogroms in 1929 and 1936. Ateret Cohanim officials estimate that the cost to purchase the rest of the buildings in the Muslim Quarter is $100 million, with another $100 million for renovations.

Ateret Cohanim uses Christian Arab middlemen to purchase property in the Muslim Quarter in order to disguise the fact that Jews are the buyers. Both Jordan and the PLO have made it a capital crime to sell property to Jews. "We were afraid of publicity," admits Louis Bloom, the English-born director of public relations for Ateret Cohanim. "We thought the PLO would come in and start a bidding war. But the PLO has been broke since the Lebanon War."

Bloom, a short, squat man who fought with Menachem Begin's terrorist underground Irgun during the 1940s, says Ateret Cohanim is negotiating for 12 additional buildings, and has a large waiting list of yeshiva students and families who are ready to move into the Muslim Quarter. "The only thing stopping us now is money," he says. "But I think that within 10 years we will have made...Jerusalem Jewish again forever."

Bloom was asked if Ateret Cohanim's efforts to Judaize East Jerusalem weren't similar to the views of Rabbi Kahane, who calls for the expulsion of Israel's Arabs. "The Old City Arabs are very poor," cooed Bloom in his large airy, Old City office overlooking the Mount of Olives. "Most Arabs live in hovels crammed with 12 kids to a room. We pay them well above market value. They are very glad to leave the Old City, and with the money they can go to Europe and open up a little business. You can get more out of Arabs by being nice. If there were another way to get them out we would use it, but we think Kahane's way is a disaster."

The Old City Arabs are well aware of Ateret Cohanim's plans. "They have outposts on every street in the Muslim Quarter," says an Arab engineer who works in the Old City. "They are pleasant enough, but we know they want to drive us out of our homes."

Ateret Cohanim raises most of its money in America. In 1984, it set up American Friends of Ateret Cohanim, a tax-exempt, not-for-profit organization incorporated in New York State. Prior to that, Ateret Cohanim had money passed to it through PEF Israel Endowment Funds Inc., a tax exempt public charity corporation in New York. The American Friends of Ateret Cohanim is given free office space on Manhattan's prestigious Fifth Avenue by the Genesis Foundation, a New York City-based, tax-exempt, religious charity that promotes "Jewish awareness." The Genesis Foundation is headed by Rabbi Jay Marcus of the Staten Island Young Israel Synagogue, who is also a member of Ateret Cohanim's board.

According to Ateret Cohanim officials, most of the money the American Friends of Ateret Cohanim collects in the U.S. goes to its subsidiary arm, the Jerusalem Reclamation Project, whose primary purpose is to purchase Arab property in East Jerusalem. Originally, Bloom says, Ateret Cohanim wanted to register the Jerusalem Reclamation Project in the U.S. as a tax exempt foundation, but was advised that the IRS wouldn't grant tax exempt status to an organization that buys and renovates real estate.

Sources close to Ateret Cohanim say it has collected generous donations from wealthy Christian Evangelicals in America who view the Jews' return to Israel as the prelude to the Second Coming. Among the largest American Jewish contributors to Ateret Cohanim, according to Bloom, are two Florida doctors, Dr. Morton Freiman who currently lives on a Jewish West Bank settlement and Dr. Irving Moscowitz of Miami, who has reportedly purchased the 52-room Shepard Hotel, formerly owned by the Mufti of Jerusalem, for $1 million. Ateret Cohanim has also launched a fund raising drive in Great Britain, where, Bloom says, it has received $100,000 from Cyril Stein, chairman of Ladbroke Group, a large British hotel, gambling, and real estate company with extensive holdings in America.

On May 27, the Friends of Ateret Cohanim held its first annual fundraising dinner for the Jerusalem Reclamation Project in Manhattan at the Hilton Hotel. The guest of honor was Mark Belzberg, a prominent Canadian Jewish businessman. Israel Ambassador to the UN Benjamin Netanyahu was scheduled to be the keynote speaker.

In Israel, Ateret Cohanim enjoys wide support from the National Religious Party, Likud, and the Tehiya Party, all right-wing political parties. Last year, the Jerusalem Reclamation Project received $20,000 from the Ministry of Interior, according to Rabbi Shlomo Aviner, head of the Ateret Cohanim Yeshiva. Among Ateret Cohanim's most ardent supporters is Avraham Cabana Shapira, the Ashkenazi Chief Rabbi of Israel. "I appeal to all those who are so able to give a helping hand (to Ateret Cohanim) in this sacred burden…and restore the light on the Torah to within the Old City of Jerusalem,"wrote Shapira in a letter of greeting to Ateret Cohanim.

Rafi Davara, the lean, languid, chain-smoking aide to Jerusalem Mayor Teddy Kollek, says that although the municipality strenuously opposes more Jews moving into the Muslim Quarter, legally there is little they can do to stop it. "Four of five times when we heard that Ateret Cohanim was negotiating with Arab property owners in the Old City, we went in and put pressure on the Arabs not to sell," says Davara. ""We can slow Ateret Cohanim down, but we can't stop them."

Even the national government is paralyzed. Amnon Rubinstein, Minister of Communications in the Israeli Cabinet, said he recently met with foreign Minister Shimon Peres to complain that the expansion of Jews in the Muslim Quarter promotes social tension and will ultimately undermine the city's international character. "What can I do?" Rubinstein recalls Peres asking. "Give me a formula!"

Most Israelis, however, believe Jews should be allowed to settle in the Muslim Quarter. In a poll published last February in the Hebrew-language daily newspaper Maariv, 62.1 % of the respondents approved of Jewish settlement in the Muslim Quarter, while 36.7% believed it was not desirable. "The struggle over real estate" is the heart of the conflict between Israel and the Palestinians, says Sam Lehman-Wilzig, senior lecturer in political studies and assistant director of the Institute for Public Communications at Bar-Ilan University near Tel Aviv. "Much of the Land of Israel was not conquered, it was bought from Arabs between 1904-1948. It was cash on the barrel head. Slowly but surely, the land moved from Arab to Jewish hands. What's happening in the Old City is in keeping with the Zionist tradition." Indeed, on the eve of the 20th anniversary of the occupation, more than 50% of the West Bank is in Jewish hands, carved into a network of roadways and electrical grids for 120 settlements housing some 60,000 people.

Meanwhile, stone by stone, and house by house, Ateret Cohanim is silently transforming the Old City into what they hope will become the pride of Jews everywhere -a holy city in service of the Third Temple. But while Ateret Cohanim burns bright with religious passion -its Arab neighbors burn with hatred and contempt.