Ultra-Orthodox Jews have been waging a battle for the soul–and the real estate–of Jerusalem, and lately they seem to be gaining the upper hand over their secular brethren. The divide between religious and nonreligious Jews is often overshadowed by the larger differences between Israelis and Arabs. That was the case last week, when Israeli authorities approved plans to build new homes for Jewish settlers in Arab East Jerusalem, and Palestinian terrorists killed two settlers. Yet day to day, the tension between ultra-Orthodox and secular Jews has a more direct bearing on the lives of Israelis, especially in Jerusalem. The haredim account for only about 15 percent of Israel’s 4.5 million Jewish citizens. But as young secular Jews abandon the capital, some observers fear Jerusalem will become a bastion of ultra-Orthodox political power. “This is the gravest threat,” says former mayor Teddy Kollek. “It leaves us with the danger of an ultra-Orthodox majority in 40 or 50 years.”

It may not take that long. Birthrates among the haredim are three times those of secular Jews, and already 55 percent of the children in Jerusalem’s state-run kindergartens are ultra-Orthodox. The numbers are beginning to tell. In the 1993 mayoral election, the haredim voted overwhelmingly for conservative Likud candidate Ehud Olmert, bringing Kollek’s 27-year reign to an end. They turned out in force again last May to support Benjamin Netanyahu’s narrowly successful bid for prime minister.

Religious Jews are part of an effort to Judaize Arab East Jerusalem. Last week a municipal planning committee approved a controversial proposal to build 132 housing units for Jewish families in the Palestinian neighborhood of Ras al-Amud. The 3.5-acre site was provided by Irving Moskowitz, 69, a reclusive Miami physician who made a fortune from hospital investments and a bingo parlor outside Los Angeles. “I purchased the property from Jewish owners in hopes of breaking down the barrier of racial segregation that Arabs had erected in the neighborhood,” he told NEWSWEEK. But Moskowitz, who owns other properties in East Jerusalem, takes a hard line on the peace process; he once compared the late prime minister Yitzhak Rabin to Britain’s Neville Chamberlain, accusing the Israeli leader of “appeasement.”

After the new housing was approved, gunmen from the Damascus-based Popular Front for the Liberation of Palestine shot up a car on the West Bank, killing a woman settler and her 12-year-old son. Both the PFLP and Hamas, the Islamic resistance movement, said they would launch more attacks. As positions hardened, Netanyahu’s government granted financial incentives to the settlers, restoring subsidies canceled by the previous government.

Jerusalem’s haredim deny they have territorial ambitions. “There was never a plan by the haredim to make secular Jews move out of anywhere in Israel,” says Jerusalem Deputy Mayor Uri Maklev, himself an ultra-Orthodox Jew. But once they gain a foothold in a new area the haredim tend to take over, imposing their beliefs and lifestyle on the neighborhood and driving secular Jews away. Last week an elementary school for secular children abandoned its premises in an ultra-Orthodox neighborhood after months of harassment by residents, who called second graders “Nazis” and “dogs.” A recent poll found that 60 percent of the city’s secular Jews were considering a move out of Jerusalem because of such bullying tactics.

Ironically, any increase in Jewish settlement on the West Bank will take some of the pressure off secular Jews in Jerusalem. Many of the settlements already earmarked for new-housing construction are ultra-Orthodox communities. If the haredim decide to expand into Palestinian territory instead of secular Jewish areas, Israel could be left more at peace with itself–and more bitterly at odds with its Arab neighbors.