Even before a new coalition could emerge, Israel's latest election was historic. It marked the collapse of Labor, the party that can plausibly claim to have founded Israel and produced its most celebrated prime ministers, from David Ben-Gurion (as head of Labor's predecessor, Mapai), through Golda Meir to Yitzhak Rabin.

The last vestige of old Labor is Shimon Peres, who - with fitting irony - is the country's president only because he quit the party. Israel's political spectrum is now dominated by three right-wing groups: Likud, Kadima (the Likud offshoot founded by Ariel Sharon) and Yisrael Beitenu, a party of Russian immigrants. But while most commentators focus on the future of the peace process and the two-state solution, a deeper and more existential question is growing within the heart of Israel.

It's a question posed by the election's biggest winner: Avigdor Lieberman. His Yisrael Beitenu party won 15 seats, placing third but gaining enormous swing power in the Israeli system. Whether or not the new government includes him, Lieberman and his issues have moved to center-stage. As fiercely as he denounces the Palestinian militants of Hamas and Hizbullah, his No. 1 target is Israel's Arab minority, which he has called a worse threat than Hamas. He has proposed the effective expulsion of several hundred thousand Arab citizens by unilaterally re-designating some northern Israeli towns as parts of the Palestinian West Bank.

Another group of several hundred thousand could expect to be stripped of citizenship for failing to meet requirements such as loyalty oaths or mandatory military service (from which Israel's Arabs are currently exempt).

Martin Peretz, the editor in chief of The New Republic, a passionate Zionist and critic of the peace movement, calls Lieberman a "neo-fascist ... a certified gangster ... the Israeli equivalent of [Austria's late politician] Jorg Haider." No liberal democracy I know of since World War II has disenfranchised or expelled its own citizens.

Today's Arab Israelis are descendants of roughly 160,000 Arabs who stayed in the lands that became Israel in 1948. Their number now stands at 1.3 million, 20 percent of Israel's total population, and demographers predict that by 2025 they'll be a quarter of the country's people. Aside from their military exemption, they have the same legal rights and obligations as all other Israeli citizens. But they face discrimination in many aspects of life, including immigration, land ownership, education and employment.

"This inequality has been documented in a large number of professional surveys and studies, has been confirmed in court judgments and government resolutions, and has also found expression in reports by the state comptroller and in other official documents," retired High Court justice Theodor Or concluded in an official investigation of the second Intifada. "Although the Jewish majority's awareness of this discrimination is often quite low, it plays a central role in the sensibilities and attitudes of Arab citizens. This discrimination is widely accepted ... as a chief cause of agitation."

The antipathy is mutual. "The people who stayed here did not immigrate here, this is our country," declared Azmi Bishara, a former Arab member of the Knesset, after being charged with sedition for his expressions of support for Hizbullah. "That is why you cannot deal with us on issues of loyalty. This state came here and was enforced on the ruins of my nation. I accepted citizenship to be able to live here, and I will not do anything, security-wise, against the state. I am not going to conspire against the state, but you cannot ask me every day if I am loyal to the state. Citizenship demands from me to be loyal to the law, but not to the values or ideologies of the state. It is enough to be loyal to the law."

For decades Israel's Arabs remained loyal to the law - and loyal to the country during its many wars with its neighbors. Now that loyalty is waning. Israeli Arabs - even those who are Christian, rather than Muslim - no longer vote for Israel's mainstream parties. Despite low turnout, the Arab parties fared well in this election, winning some 11 seats in the Knesset. These parties have never been invited into the government, which limits the influence of the Arab population in Israeli politics.

For Israel, handling the relationship with its Arab minority is more crucial even than dealing with Hizbullah or Iranian President Mahmoud Ahmadinejad. Israel needs to decide how it will deal with the Arabs in its midst. As extreme as it may sound, Lieberman's call to disown them seems to have resonated with many of his fellow Israelis. Benjamin Netanyahu, the Likud leader, has warned that Israel's Arabs constitute a demographic time bomb. He calls it unacceptable.

Benny Morris, the once dovish historian who chronicled the forced expulsion of most Palestinians from the Jewish state in 1948, has turned to arguing that Israel needs to protect itself from the Arabs now living within its borders. "They are a potential fifth column," he warned five years ago in an interview with the Israeli daily Haaretz. "In both demographic and security terms they are liable to undermine the state ... If the threat to Israel is existential, expulsion will be justified."

It's a dangerous spiral: the worse the distrust gets, the less loyalty Israel's Arabs feel toward their country - and vice versa. Last week's election has brought the issue into the open. Its resolution will define the future of Israel as a country, as a Jewish state, and as a democracy.