JAFFA, Israel - The Hattab home -- grey paint peeling from the walls, foundations sinking through the ground -- is squeezed in by brightly painted, three-storey villas blocking its view of the Mediterranean Sea.

Our neighborhood is shrinking. But why should we have to leave? It's where we've raised our children, where we grew up. If we're all evicted, well, you tell me who is left, says the Hattab's neighbor, Esther Seba.

She and the Hattabs are among almost 500 Arab families struggling to keep a toehold in Ajami, the Arab section of Jaffa that is rapidly becoming an artsy alternative to the brash modernity of Israel's metropolis Tel Aviv next door.

The government should help us find a way to buy our homes or pay rent. Instead, they're trying to clear us out of here. Where are we going to go? says 33-year-old Esther.

Ownership of much of the property is disputed. Ajami, once a slum slated for demolition, is in the birth pangs of rapid gentrification and developers won't wait.

These people are living in shacks with million-dollar beach views, said Yudit Ilany, 49, a Jewish Israeli resident and activist who is trying to help families keep their homes.

Five years ago, residents were awoken by the occasional night-time commotions of a violent slum, a subject explored in the movie Ajami, Israel's entry for the 2010 Academy Awards.

Today, residents say it's not gunshots, but early morning construction crews that shatter the calm here.

BENIGN NEGLECT

Ironically, it was long neglect by the twinned Tel Aviv-Jaffa municipality that preserved the narrow alleyways and traditional, but decaying, Arab architecture.

Jaffa was a major port and cultural center of the Arab world before Tel Aviv was established in 1909 by Jewish settlers. In the war that established Israel in 1948, much of Jaffa's Arab population was driven out or fled and the old city is now a shadow of its former self, absorbed by its modern neighbor.

But while once considered an eyesore, Ajami's character today tempts those fleeing Tel Aviv's soaring prices and burgeoning high-rise apartment blocks.

Six years ago, a house here cost $50,000 to $60,000. Today, a 140 sqm (1,500 sq ft) plot goes for about $1.2 million.

The prickly problem is the fate of Ajami's 20,000 Arab residents, 80 percent of whom live below the poverty line. About a quarter of them live in state-run Absentee Ownership properties, which the Israeli government now wants to sell.

Israel says these homes were abandoned by their Arab owners during the 1948 war that established the Jewish state. When the war ended, the state took them over as public housing for both Jewish and Arab families.

Refugees, many of whom ended up in camps in the Palestinian enclave of the Gaza Strip, down the coast, say their families were driven out of Jaffa and still lay claim to homes there.

BORN SQUATTERS Most Arab residents of Ajami say they are living in homes that were once owned by their families, and should be treated as rightful heirs. Instead, they are protected tenants whose right to the homes expired after two post-1948 generations.

If you are from the third generation, you became a squatter the day you were born, Ilany said.

The squatters are now fighting eviction. They say Amidar, the company contracted by Israel's Land Authority (ILA) to run the properties, stands to make a killing by selling their homes.

The government became a profit-seeking company, said Sami Abu Shihadeh, who sits for Ajami on Tel Aviv-Jaffa city council.

The Ministry of Housing told Reuters that any questions about issues relating to the Absentee Owner law should be addressed to the ILA. Neither the ILA nor its subcontractor Amidar responded to repeated requests for interviews, by telephone and in writing.

Latifah Hattab is typical of third-generation families trying to establish legal and historical rights to the houses they live in. The Hattabs, juggling eight different law suits, were offered a jigsaw settlement by Amidar.

They said we had rights to 60 percent of this property, because my husband's mother is second generation, but the other 40 percent is theirs, said Latifah, whose single-level house sits on about 120 sq.m.

They want us to buy them out. But guess how much they say that 40 percent is worth? Two million shekels ($540,000) or more! How am I going to get that kind of money?

Though they are sitting on million-dollar properties, low-income families like the Hattabs cannot simply sell, or raise big loans, because their ownership is disputed.

NOWHERE TO GO

Esther Seba says the aim is clearly to get Arabs out.

If the state wanted us here, they would build some affordable housing, she said. Instead, they built a park. What are we going to do with a park? We need houses.

Ajami's Arab residents say they are being encouraged to move to inland Israeli cities, such as Lod, also known as Lydda, or Ramla, where there are large Arab populations and cheap housing.

We have high housing prices combined with a strategic political effort to get Arabs out of Jaffa, said Omar Siksik, an Arab representative at the municipality who believes there are more than purely market forces at play here.

Siksik shares the view of fellow councilman Abu Shihadeh who says that the overwhelming majority of those who are wealthy and who are in administrative positions here are Jews. And that, they say, adds a racial and political dimension.

That's the problem, says Abu Shihadeh. There is gentrification everywhere. But here, the victims are Arabs, and the beneficiaries are Jews.

Jewish activist Ilany says there is no viable alternative to Ajami for Jaffa Arabs, whether they are Muslims or Christians, who want to carry on living in the Tel Aviv metropolitan area.

Ajami has employment opportunities because it's close to Tel Aviv. They can't move to neighboring areas, which have no mosques, no churches, no Arabic language schools, she says.

And why should they leave because some wealthy person can afford the land they've always lived on?

(Editing by Douglas Hamilton and Samia Nakhoul)

Israel