January 31, 1988

LEAD: A new state agency to deal with the AIDS crisis in New Jersey will be urged by Governor Kean in his proposed $11.8 billion budget. Page 36.

LEAD: SOME three years ago, two Israeli college students were out on a hike on a sunny weekend morning near a monastery outside Bethlehem. An angry Palestinian youth, who had somehow got hold of a gun, ran into them on the trail and decided on the spur of the moment to tie them to a tree and murder them for nationalist reasons.

LEAD: ON the east side of Manhattan, from 96th Street north, empty lots still outnumber condominiums, boarded-up windows are more common than ''For Sale'' signs and trash far exceeds brass. Nonetheless, people who live there are worried that the neighborhood is getting trendy.

LEAD: AFTER months of hearing complaints that New Jersey hospitals can no longer afford to recruit and retain enough nurses, state regulators have given the institutions an 8.5 percent across-the-board rate increase. Due to take effect tomorrow, it will be the largest increase since the state began, in 1980, to tell hospitals how much they could charge.

LEAD: A former RKO movie theater is being converted into nine storefronts on Broadway at 232d Street in the Kingsbridge section of the Bronx. The 14,500-square-foot building, which David Magier purchased last August for $1.4 million, was built in the 1920's and for the past 20 years has been used as a bingo parlor.