At the present time (mid-2010), about 20% of the population of Israel is comprised of ethnic Arabs.
They are citizens of Israel, with the rights and responsibilities of all other citizens, except that they are
not responsible for military service. Along with other citizens, Arab citizens of Israel have the right to
vote in the elections if they so choose; Arabs have been elected and occupy seats in the Knesset ...
Israel's parliament.
170,000
It created a Jewish state on land that most Arabs believed rightfully belonged to the Palestinians.
Only 170,000 Arabs who lived in what would become Israeli-held territory after the war prior to the war in 1948 remained in Israel after 1948. (The phrasing is convoluted since the borders of Israel were only established after the 1948 war, however, if we use those same borders and extrapolate them into the past, this is where the 170,000 number comes from. Note also that this number does not count Druze, Bedouins, Circassians, Armenians, and any other non-Jewish minority that does not identify as Palestinian). Since the question does not ask about it, this question will not deal for the reasons behind that departure. More on that can be read at the Related Question below. It is also worth noting that 170,000 Israeli Arabs who remained in Israel in 1949 have now blossomed into a population of more than 1.6 million individuals. Please see the comment section for more information on other ambiguities.
They are the people who stayed in Palestine after Israel declared its Independence in 1948. These Arabs were given the option of having Israeli citizenship and took it. They live in the pre-1967 Israel only.
Many Arabs fled Israel and were forced to live in refugee camps for decades.
The neutral name is the Arab-Israeli War of 1948-9. The Israelis call it the Israeli War of Independence. The Arabs call it the Nakba or Great Catastrophe.
Israeli is the common term. However, I know Israeli Arabs who would prefer to be called Palestinians, and before 1948, Jews from the region now known as Israel were known as Palestinian Jews.
The conflict in general is called the Arab-Israeli Conflict. The particular war that erupted due to the Arab Rejection of Israel's Declaration of Independence was the Arab-Israeli War of 1948-9, alternately called the Nakba by Arabs and the Independence War by Israelis.
Israel declared independence in 1948, but only established full control of its territory in April of 1949, when it was victorious in the Arab-Israeli War of 1948-9, which the Israelis call the Israeli Independence War and the Arabs called the Nakba or Catastrophe.
In May 1948, about 1,250,000 Arabs lived in British Mandate Palestine. 670,000 Arabs fled the new state of Israel and slightly less than 65,000 were ever able to return to their homes. That resulted in slightly more than 605,000 Palestinian Arabs, becoming refugees in countries outside of the new state of Israel. Children and other relatives, have been added to the total number of Palestinian refugees over the years.
It is unclear what an "Israeli" is prior to 1948 as there was no state of Israel before that point. If the term "Israeli" is also pushed back to the forerunners of the State, the Zionist Palestinian Jewry, it still only goes back to conflicts in the early 1920s. Additionally, many non-Zionist Palestinian Jews and Palestinian Arabs would also have descendants who would be Israeli citizens. Between all of the various wars and riots since the 1920s, roughly 25,000 Israelis and Palestinian Jews were killed at Arab hands (either Palestinian Arabs or Arabs from other countries). Prior to 1920s, the numbers would been incidental.
It created a Jewish state on land that most Arabs believed rightfully belonged to the Palestinians.