A BASIC lack of understanding exists between the Bush administration and the Shamir government regarding the provision in United Nations Resolution 242 requiring the "withdrawal of Israeli armed forces from territories" in exchange for "peace within secure and recognized boundaries."President Bush believes that the resolution requires Israel to surrender territories captured in the 1967 war on all fronts. The Shamir government rejects this on the grounds it would undermine Israel's security and usurp its historic right to settle Jews on their ancient homeland. The Likud government points to Israel's return of the Sinai to Egypt which represents 90 percent of the territories in question. The view of Israeli officials with whom I spoke is that the gulf between the United States and Israel on this issue is so wide it is bound to jeopardize the proposed peace conference. Bush and Prime Minister Shamir must find a formula to reconcile their differences on this issue before the peace conference convenes. But Bush and US Secretary of State James Baker must first understand why Israel feels the way it does about the territories. First, if the Israeli search for total security seems like an obsession, it is. Considering centuries of persecution, expulsion, and despair culminating with the Holocaust, followed by 43 years in a state of war, obsession with national security becomes understandable. Peace with the Arab states, the Shamir government maintains, offers only a marginal measure of security. Israel remains a lonely democracy in an Arab sea of political instability, economic disparity, despotism, and arbitrary rule - providing a perfect recipe for continued regional strife and volatility. Iraq's invasion of Kuwait and the subsequent war, which victimized Israel in the process, provide fresh reminders. For this reason, the Israelis insist that the Golan Heights and the rugged topography and depth of the West Bank are indispensable to their country's security. Israel needs defensive positions to hold back a massive ground attack, which is the main threat to Israel's existence. Second, for Israelis the settlements represent the process of Jewish redemption in their historic homeland. The right to live in Biblical Jericho, Bethlehem, or Shiloh is viewed by most Israelis as a natural and direct connection to the source of their heritage. There will be no circumstance under which Israel would negotiate its heritage, says one Israeli official, even if it were denied US financial assistance altogether. Although Bush considers Israel's settlement policy illegal and an obstacle to peace, he will commit a serious error of judgment if he thinks a Labor-led government will be more accommodating. The retention of these settlements transcends party lines. No Israeli government can survive the political storm should it contemplate the dismantling of any sizable number of settlements - even for the sake of peace. This, however, need not be at the expense of establishing full Palestinian political autonomy in th e West Bank and Gaza, says Israel's Deputy Foreign Minister Natanyaho. FINALLY, united Jerusalem as Israel's capital is the symbol of renewed Jewish commonwealth and the embodiment of Jewish freedom. No UN resolution can change that fact. History reveals no other people so completely and irrevocably fused to a single place, and neither centuries of exile nor any ruler's edict has been able to sever that attachment. Without Jerusalem, there can be no state of Israel, and Israel's enemies know that all too well. In Massada, the Jews chose suicide over surrender; for Jerusalem , the Israelis would fight to the last man rather than surrender. By contending that East Jerusalem is occupied territory, the US has given rise to a false expectation in the Arab world that the future of Jerusalem may still be negotiable. Israel's position on Jerusalem, although unequivocal, is consistent with the Arab absolute right to direct their religious and cultural affairs, as they have since 1967, free of Israeli intervention. The Israeli stand on these critical issues can be reconciled with Arabs provided that the Bush administration does not lose sight of the Middle East's inherent volatility. Bush, in this connection, must place considerably more emphasis on cooperation with genuine partners such as Israel, especially on issues of security. Israel's confidence in the US has been shaken. To restore it, the Bush administration must recognize anew that lasting ties and friendship between countries depends on common values. That was the historic basis that sustained the special US-Israel relationship for its own sake. Only by building on those common values and genuine understanding can lasting peace be realized.