One of the stranger and nastier episodes of modern Israel-Diaspora mud wrestling was laid to rest in late June in Jerusalem when Natan Sharansky, the onetime Soviet political prisoner and human rights icon, was elected chairman of the Jewish Agency for Israel.

The episode was unusual because it broke new ground in the growth field of Israel-Diaspora mutual incomprehension. It was nasty because of the intense vitriol it generated. The mud was flying with a fury rarely seen in the chummy interaction between Israeli leaders and their big donors. You donít often hear Israeli Cabinet ministers ridiculing the cream of Diaspora Jewish philanthropy. Nor do you expect to see Israelís top Diaspora fundraisers telling the prime minister where to go.

The trouble began last February, when newly elected Israeli Prime Minister Benjamin Netanyahu announced that he wanted Sharansky to become Jewish Agency chairman. The Jewish Agency is Israelís largest nongovernmental social service body. Itís the main destination of all those dollars that Jews give to Israel through their local Jewish community federations. Itís also Israelís legally designated link with the Diaspora. The chairmanship is a Cabinet-level public position. Sharansky seemed like just the right choice.

To Netanyahuís astonishment, the nomination was dismissed by the leaders of those Diaspora philanthropies, who make up half the Jewish Agencyís board. He was angry, and he let them know it.

The Diaspora leaders had their reasons. The Jewish Agency is commonly described as a corrupt, bureaucratic dinosaur and a dumping ground for has-been Israeli politicians. Twenty years of Diaspora pressure has brought serious change, but its reputation hasnít caught up, and the pressure continues. The latest reform plan calls for separating the Jewish Agency from Israelís Chicago-style political system and turning it into a modern, transparent charity. The plan was due for approval at the boardís June meeting.

The donors were stunned, then furious, when Netanyahu picked this moment to send them another political crony ó even if it was Sharansky himself.

Tempers flared as the board meeting approached. Netanyahu threatened to cancel his keynote address to the Jewish Agencyís annual assembly, an unprecedented slap by a prime minister. His Diaspora affairs minister, longtime Sharansky ally Yuli Edelstein, declared that if the Jewish Agency really wanted to be just another charity, then Israel could simply junk the agencyís half-century legal status and find other charities to work with.

Thatís no small thing. A divorce might well pull the rug out from under those ďGive to IsraelĒ appeals that the federations rely on. How can you speak for Israel if you donít represent it?

At the last minute a compromise was reached. The philanthropistsí reform plan was ratified, promising no more cronyism (starting next time). Deals were struck to appease the spoilers jeering from the sidelines: a post here for Labor, a portfolio there for Kadima. As for Sharansky, he was named chairman by a unanimous board vote. Still, tempers remain raw. The latest feud has been patched up, but the underlying problems remain.

It looks like a turf war, but itís more. The two big communities are divided by a yawning gap in basic Jewish self-understanding. In America, being Jewish is about personal identity and voluntary engagement. In Israel itís about membership in a Jewish polity. Both sides want a relationship, a concrete expression of Jewish solidarity, but they canít agree on what that means. American Jews keep looking for Israeli partners who share their independent, volunteer spirit, and they keep on bumping into politicians. Israelis keep looking for an authoritative American Jewish institution with which to partner, and they keep finding ó well, free spirits.

The Jewish Agency is where these differing perspectives collide. Its Diaspora leaders canít see how a philanthropy can legitimately entangle itself in politics. The Israeli leaders canít imagine a national institution that isnít political. Year by year the two communitiesí self-understandings diverge further, defining common ground becomes harder and the Jewish Agencyís standing becomes more tenuous.

Thatís why the Americans are so eager to reform the Jewish Agency. Itís also why the Israelis canít quite believe the Americans are serious about monkeying with it. The stakes are enormous. With an annual budget of $640 million, the Jewish Agency is the biggest Jewish institution in the world. It has the resources, the long reach and the broad mandate to tackle just about any major Jewish crisis in the world.

After all, it built the Jewish state, brick by brick, as the Jerusalem operations office of Theodor Herzlís World Zionist Organization. After Israel won its independence, when everyone thought the Jewish Agency was through, it resettled 2 million refugees in the newborn state. It provided tens of thousands with homes, jobs and Hebrew lessons. It built new villages. In the 1990s, after its obituary had been written, it moved a million Russians to Israel.

Now itís time to find the next crisis. The obvious one is assimilation, helping young Jews reclaim their Jewish identities. One smart Jewish Agency official, educator Bobby Brown, once suggested creating a giant international board of Jewish education. Thereís no other institution with the resources and the worldwide presence to do that.

In fact, the Jewish Agency already has some big, well-run education programs. But it doesnít think big enough. Most of its leaders on both sides think their job is to pool the worldwide resources of the Jewish people to strengthen Israel. Today, itís the worldwide Jewish people that needs strengthening.

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