Israel's Prime Minister Yitzhak Shamir claimed recently he is eager to negotiate the future of the West Bank and Gaza. Secretary of State James Baker is seeking to lead, or cajole, the Israeli government in the direction of trading land for peace.

But that is not the direction Shamir's government wants to go.The future of the West Bank and Gaza cannot be settled in a vacuum. Both the Israelis and Palestinians are beginning to learn that a settlement is possible only if it accounts for the more than 2 million Palestinians living in the various Arab states, many of whom may want to live in a Palestinian state.

The unpleasant truth is that a solution to the problem of the Palestinian refugees would require sacrifices by Israel, by the Arab states and by the Palestinians themselves.

It has been easier to argue about which Palestinians are acceptable as representatives of the West Bank and Gaza and whether Israel would ever allow the dread word "sovereignty" in negotiations.

What is being forgotten, though, is that the West Bank and Gaza are already, de facto, a separate realm.

When the gulf war began, the thousands of Arabs who crossed over into pre-1967 Israel were immediately denied entry on security grounds. Their jobs as menial laborers, since filled by Soviet immigrants, are not likely to be returned.

Despite this separation, most Israelis support Shamir's refusal to countenance Palestinian sovereignty.

Even Israelis who accept "the principle of territory for peace," as President Bush put it in his speech to Congress, still fear that a Palestinian state would inevitably follow the Israeli example in enacting its own Law of Return. Any Palestinian could move in at will. Many Palestinians in Kuwait sided with Iraq and many are now seeking new homes.

The Israeli press reports that Palestinians in Kuwait have been asking relatives to help them take refuge in the West Bank from the wrath of the Kuwaitis.

A deal between Israel and the Palestinians could not be sold in Israel unless it was perceived as requiring the Arab states to share the burden of a settlement.

The Arab states would have to agree to grant the Palestinians who live within their borders irrevocable rights of residence and economic participation.

The Arab states, with the exception of Jordan, have made it difficult or impossible for Palestinians to acquire local citizenship or the right of permanent residence.

An Israeli majority might vote for a settlement if it is reassured that the Palestinian state will not teem with angry enemies.

After their disastrous alliance with Saddam Hussein, the Palestinians know they must move to a compromise. The Arab states are clearly tired of their tensions with the Palestinians.

All that is needed is money.

The Arabs of the West Bank and Gaza, now largely separate from Israel's economy, are in deep economic difficulty.

If the Arab states do grant permanent residence and a place in their economies to the Palestinians, they will need help creating new jobs. The governments that have been pleading the cause of the Palestinians will now have to join in providing massive economic aid.

After World War II the United States led the political reconstruction of Europe, an effort that helped make peace, after centuries of war, between France and Germany.

The embitterment between the Arabs and Israel will end only within such a larger settlement in the Middle East.