WHAT A DIFFERENCE a war can make. Before the allied bombing of Iraq began, Israeli Prime Minister Yitzhak Shamir seemed destined never to win any popularity contests. Devoid of charisma, stubborn and introverted, the Prime Minister often provoked yawns in Israel and a feeling of anxiety in Washington.

Once air-raid sirens first wailed throughout Israel, however, Shamir's image improved enormously. He was praised for his unprecedented restraint and calm leadership in the face of the Iraqi Scud missile attacks that killed at least four Israeli civilians and left more than 300 wounded. During the war, Shamir enjoyed the highest popularity rating he has had during his many years in office.

As far as his country's national security was concerned, the Gulf War seemed to change things for the better as well. The Palestinians once again found themselves on the losing side. Shamir's government, the most right-wing in Israeli history, appeared to be saved from the fierce opposition coming from the international community. Arab unity had once again been ripped to pieces: Heaven on Earth!

The only thing which could have made this picture brighter would have been the complete overthrow of Saddam Hussein.

YET UNLESS Shamir can adapt to the postwar order, these gains will be short-lived. As long as he continues to refuse to deal with the Palestinians, Shamir cannot expect peace with the Arab states. And without Israeli cooperation, Washington will not automatically provide the support for every Israeli request. President Bush's current attempt to withhold co-signing a loan to fund the absorption of Soviet Jews is a good example of the stands the White House is willing to take.

But Soviet Jews themselves are not an issue which could deadlock the peace negotiations. No one is trying to impede their immigration to Israel. The United States and Western Europe, which pressed long and hard for the right of these Jews to emigrate, recognize an obligation to help Israel absorb them. The four month delay in loan guarantees that President Bush seeks would not jeopardize this process.

The showdown is really about the Shamir administration's policy of rapidly and provocatively expanding Jewish settlement in the occupied West Bank, Gaza Strip and Golan Heights. This policy directly compromises both the atmosphere of a possible peace conference and the geographic possibility of trading land for peace.

The powerful remark Saddam Hussein made before Operation Desert Shield turned into Desert Storm still gnaw at world opinion: "If Israel withdraws from the Arab territories, I may think of withdrawing from Kuwait."

THE MIDDLE EAST peace conference, if it proceeds, will be a historic achievement. The credit for the achievement will go to those diplomats who put in a remarkable effort to create the basis for a new world order based on collective security and international law. Because of these advances in diplomacy, Israel has a chance to achieve what it has sought since its creation: direct talks with Arab neighbors on recognition and peace. Jerusalem now has to recognize the need to negotiate with representative Palestinians.

As long as the Shamir government refuses to take a stand and make substantial progress in negotiations, President Bush is justified in urging Congress to delay action on Israel's request for $10 billion in loan guarantees to resettle Soviet Jews.

WE HAVE NEVER been closer to living in a world in which people are eager to form open societies in which they share, discuss and tolerate each other. Using U.S. financial leverage to advance that nolonger utopian cause is neither deceptive nor anti-Semitic. Bush deserves credit, and not criticism, for conveying passion for a cause in which he believes.

If Shamir simply chooses to hunker down and avoid compromise, his nation may find itself even more isolated than it was before the Gulf War. Solitude in a world filled with mistrust and conflict was one thing. Isolation in a world built on principle and justice might well be something else.