WHEN the Oregon Shakespeare Festival's directors met last year to plan the 1991 season, artistic director Jerry Turner wondered if it was no longer possible to present "The Merchant of Venice," given the strong anti-Semitism depicted in the play.Libby Appel, who describes herself as "a Jewish girl from Brooklyn," argues that "this play is absolutely doable and necessary to do," because of all Shakespeare's plays, "this seems to fit our times." Ms. Appel has not always felt this way. As a youngster in the 1940s, she had been horrified by the pictures from the concentration camps in Europe. Even in recent years, she viewed "Merchant" as "a kind of hateful play and icky, and who wanted to get near it?" But now she says her understanding of the play has changed. Her position as a highly respected director who has worked in many theaters around the United States, who won a DramaLogue directing award, and who has been a drama school dean, persuaded Mr. Turner to let her do "Merchant" this year. As she explained this spring in a lecture at Southern Oregon State College's Center for Shakespeare Studies, the play is about people who are not only elitist, xenophobic, and materialistic, but rushing forward and gambling (or "hazarding," to use Shakespeare's word) in a way that puts them "on a collision course with disaster." This includes Shylock, but especially describes the Christian merchants and sycophants who torment the Jew. In Appel's production, the first four acts present a jarring, modern-day blending of Venice and Wall Street - dangerous and filled with a confused mix of sexual and monetary power, not unlike Tom Wolfe's "Bonfire of the Vanities." Antonio (the merchant of the title) is suffering from lethargy, malaise, and emptiness, as is Portia in her privileged estate in Belmont. It is a world without harmony or balance. In seeking his "pound of flesh" from Antonio, Shylock is vengeful, but his obsession with vengeance is justified, according to the director, "because Shakespeare is too great an artist not to justify the behavior of what seems to be the villain of the play." But in the last act, the mood changes as nocturnal, heavenly music fills a set stripped of the symbols of power. Here, where the characters talk wonderingly of "such a night," Appel reveals the real "quality of mercy" that Portia earlier has talked about. It is, says Appel, "the mercy of God ... who is sacred and larger than all of us, a universal spirit that is so much more profound, with greater breadth than any of us can imagine." "For a moment these people are lifted out of their ugliness, and they are touched by a kind of spirit ... a kind of bittersweet feeling almost like an epiphany that frightens you and excites you at the same time," she says. "That's what I felt the last part of the play was, and I felt that was the real mercy in the play." "The Merchant of Venice" in modern dress and with modern images is disturbing, Appel admits. But "the purpose of theater is to reach people's lives," she says, "to inspire them to feel, to think, to provoke them to examine their own lives and the world around them.... I think it's important to make you aware that our society moving toward greed and materialism will bring us all to ruin and disaster," she says. "I wanted you to be aware that what we do to one another is pretty ugly, ladies and gentlemen, and we've got to get a hold of that and examine that in our lives, and not let greed push us so far that we lose our values."