JAFFA - As a student at a college in Safed, a small city of 30,000 residents, Yusuf checked apartment after apartment, hoping to find a home close to his academic institution. Never did the 19-year old anticipate the reaction from Rabbi Schmuel Eliyahu, the local town rabbi.

In letter published in Safed, Rabbi Eliyahu claimed Jewish religious law forbids renting or selling apartments to Arabs, and demanded a social ban on Jews violating his ruling. It is the duty of the seller or renter’s neighbors and acquaintances to warn him, to move away from him and prevent exchanges with him, Eliyahu wrote.

Shocked and scared, Yusuf , the Bedouin student condemned what later became known in Israel as the rabbi’s racist ban. We don’t come here to steal homes or to threaten children, Yusuf told the Israeli newspaper Yedioth Ahronoth. Prior to 1948, Safed had a Palestinian majority, and Palestinian President Mahmoud Abbas is among the children made refugee during the war.

However, not everyone adhered to the rabbi’s call. Eli Tzaviele, a 89-year old Holocaust survivor who lost his parents in Auschwitz, says he will continue renting out rooms to Arab students. They are great kids, he says. People often stigmatize Arabs, but that’s wrong, he adds.

According to Israeli law, the rabbi’s call is illegal. Nearly 20 percent of Israel’s population of 7.5 million is of Palestinian origin, often known in the Arab world as the 1948 Palestinians. Ironically, Israeli Palestinians enjoy wider democratic freedoms in Israel than other Arabs enjoy in Arab countries. But the Palestinians inside Israel also suffer discrimination, especially in state budget allocations and, as here, in issues dealing with land and housing.

When the apartment-renting ban became a nationwide scandal, Avishai Braverman, a Labor minister in Benjamin Netanyahu’s coalition government, called for the dismissal of rabbi Eliyahu, who, as a municipal employee, receives a tax-funded salary. But soon a group of 18 other municipal rabbis published a letter supporting their colleague from the Galilee city of Safed.

The struggle, which was ignited by the Bedouin student seeking to rent an apartment, came to embody the deeper conflicts within the Israeli society, and in particular, the struggle between the liberal Israelis trying to maintain a democratic state and fundamentalist Jews trying to pull Israeli in a theocratic direction. It’s the local version of a classic struggle: if not between state and church, then state and synagogue.

The struggle, nevertheless, goes back to the days before Israel was established in 1948. The early Zionists, often young men and women, had sought to create a “new Jew,” and showed little interest in religion. No longer would Jews live in fear of Anti-Semitism; instead the “new Jews” would be proud, independent and self-reliant – in their own country. Usually driven by a socialist dream of creating a more just and equalitarian society, they rebelled against traditional Judaism.

The early Israelis saw their Jewish identity less in terms of religion, and more in terms of ethnic and cultural identity, and let traditional Jews carve out semi-autonomous spheres by allowing, for example, the establishment of religious courts. Still today the majority of Israel’s Jews are secular and non-religious. However, due to the fragmentation of Israeli society and politics, religious groups gained influence, as larger political parties require their support to build coalition governments.

Surprisingly, Israel’s early leaders even had little personal interest in religious Judaism. David Ben Gurion, the country’s first Prime Minister, for one, had a long flirt with Buddhism, and practiced yoga.

However, a turning point came in 1967, after the six-day war with Egypt, Syria and Jordan. Israel came to occupy the West Bank and East Jerusalem, and the “return to the Biblical lands” created the seeds of what was to become a struggle for the nature of Israel’s political system: whether the supreme authority would be a Western-inspired legal system or traditional biblical law. The peak came in 1995, when a Jewish fanatic assassinated Prime Minister Yitzhak Rabin during a pro-peace demonstration in Tel Aviv, because he had expressed willingness to give the Palestinians what many religious Jews view as West Bank land God promised to the Jews.

Prime Minister Netanyahu’s reluctance to act against rabbis like Eliyahu, the Safed municipal rabbi, also came at a time when the Knesset, currently dominated by right-wing parties, is considering what many argue are racist and anti-democratic proposals.

One proposal - though defeated - suggested all Israeli citizens, including Arabs, must swear loyalty to the Jewish state. These days the Knesset is considering outlawing anti-occupation activists’ calls for an economic boycott of Israel.

Earlier this month, though, the conflict between the rabbis and the Jewish state intensified. Rabbi Dov Lior, a known extremist from the West Bank settlement of Kiriat Arba near Hebron, endorsed a book that openly incited violence. The book, “The King’s Torah,” argues that Jews may preemptively kill non-Jews if they feel threatened.

When police recently summoned Lior for questioning, he never turned up, and was soon arrested. Hundreds of his followers demonstrated in Jerusalem to protest his arrest. The Israeli police also arrested the son of a prominent rabbi and Netanyahu’s own coalition partner over similar accusations. Nobody in Israel is above the law, Netanyahu then said, in a meeting with his ministers.

Israel’s deep fragmentation, where several communities live side-by-side - the secular Israelis, the Arabs, the settlers, the ultra-orthodox and the Russian immigrants to name a few - has created a certain live-and-let live culture, allowing for pockets of racism in peripheral groups. While each group maintains its own social codes, mainstream Israel, nevertheless, did react harshly against the rabbis’ racist calls. Last week, Maariv, an Israeli tabloid, dedicated its entire front page to an article against religious fanatics. We do not want to become Iran, the tabloid shouted in bold type.

But for Uri Avineri, a famous long-time peace activist, the struggle against religious fanatics is crucial to Israel’s survival. For Israelis this is not just an academic question. Transforming Israel into a state run by orthodox Jewish law means castrating the democratic system, he said recently.

Nevertheless, the right wing parties in Israel, which are frequently the most critical to peace agreements with Arab countries, often receive the bulk of their votes from Jewish immigrants from Arab countries and their offspring. Memories of anti-Jewish acts in Arab countries are commonly said to explain their distrust vis-à-vis peace moves.

However, according to professor, Yehuda Shenhav at the Tel Aviv University, the answer lays elsewhere. Shenhav, a son of Iraqi immigrants, says the European Jewish elite, which established Israel, oppressed Jewish Arab culture for decades, and consequently, Jewish immigrants from Arabs countries learned to distance themselves from their own Arab heritage. Zionism asked Arab Jews to relinquish their Arab identity, says Shenhav, a sociologist. He and other activists established the Eastern Democratic Rainbow, an organization which seeks to restore Arab culture and identity to Jewish immigrants from Arab countries and build bridges to neighboring countries