This paper looks at the dynamics of spatial segregation in Israel as an outcome of state policy. In particular, the spatial distributions of two populations were examined, Eastern Jews versus Western Jews, and Arabs versus Jews. The analysis relates to the statistical natural areas of the country and the municipal areas of three main urban centers: Tel Aviv, Jerusalem and Haifa. Data used was that available from the national census data of 1961, 1972 and 1983. The findings were based on a computed index of segregation which has its origins in the index of dissimilarity in statistical geography. The research findings show that contrary to official statements there is no evidence to support the thesis that with time the spatial differentiation based on class and race is disappearing. On the contrary, a significantly large degree of residential segregation at the national level and at the urban level was observed. This is despite national programs which proclaimed integration and dispersion. Israeli society is becoming increasingly bifurcated, notwithstanding the official narrative which has declared rapid upward mobility of Eastern Jews and of Arabs who belong to the talented and educated sectors. Parallel to the official narrative, an alternative narrative of the separation and the concentration of the ethnic underclass must be faced. According to the research findings there are clear indications of the spatial differentiation and concentrations of ethnic groups. This finding, in conjunction with previous research showing widening gaps in level of residential quality between ethnic groups, leads to the conclusion that if present trends in governmental policy based on privatization and market solutions continue, Israel will see an increasing ghettoization of the ethnic underclass both nationally and in the urban areas.