Baker Suggests Steps to Peace : Middle East: He offers a menu of concessions that would freeze Israeli settlements in occupied territories. In turn, Palestinians would set aside PLO leadership.

Secretary of State James A. Baker III offered Israeli and Palestinian leaders a menu of steps toward peace Tuesday that included highly charged concessions from each side: Israel would be asked to freeze Jewish settlements in the West Bank and Gaza Strip, the Palestinians to set aside the leadership of Yasser Arafat and the Palestine Liberation Organization.

During the second day of his first-ever visit to Israel, Baker met separately with Israeli Prime Minister Yitzhak Shamir and with a 10-member Palestinian delegation led by Jerusalem-based nationalist leader Faisal Husseini.

The two meetings were key steps in Baker’s new peace initiative, which is intended to nudge Israel, the Palestinians and the Arab states toward several simultaneous sets of negotiations. Baker launched the effort in talks with Arab leaders in Cairo and Riyadh, Saudi Arabia, earlier this week.

A senior State Department official emphasized that Baker did not urge either side to make any specific gesture--he merely asked them to consider what steps they would be willing to take.

Later on, after he has probed each side for points on which they might be flexible, Baker may try to arrange a set of “parallel moves” by Israel and the Arabs, the official said.

“What we’re saying is, ‘There’s a range of steps out there, and why don’t you consider these kind of steps?’ ” he said. “We have not said . . . here’s the step we most prefer you to take.”

Another official noted that Baker has deliberately refrained from asking for specific actions or commitments on issues. “The secretary has made a point of saying, ‘I don’t expect an answer from you right now,’ ” the official said.

Officials said Baker raised the issue of Israeli settlements in the occupied West Bank and Gaza Strip in his talks with both Shamir and Foreign Minister David Levy.

“Our position is that settlements are an obstacle to peace, and so anything that would take that into account . . . would obviously be helpful,” a senior official said.

Baker told the Israelis that he is disturbed over a recent report that the government is considering building 10,000 new housing units for Jewish families in the occupied Arab territories but also made it clear that the settlement policy could be part of the overall negotiating process, the official said.

Baker also suggested that Israel consider embracing the concept of trading territory for peace, the official said, even though Shamir’s Cabinet specifically rejected that formula this week.

Neither Shamir nor the Palestinians seemed quite ready to deal with such far-reaching suggestions.

Yossi Ahimeir, a spokesman for Shamir, said that whatever the solution to the Israeli-Palestinian conflict, “it has nothing to do with the right of Jews to live in settlements.”

Ahimeir maintained that Jewish settlement of the occupied territories, home to 1.7 million Palestinians and about 100,000 Israelis, has become a “natural process.”

A Foreign Ministry official said that a freeze on settlements is a virtual impossibility under Shamir. “The government platform specifically calls for the expansion of settlements,” he pointed out.

Avi Pazner, another aide to Shamir, listed other more likely confidence-building measures the government might take: opening Palestinian universities that have been shut down by military order and the liberalizing of foreign investment rules in the West Bank and Gaza.

Pazner, in keeping with the general line of the government, focused positively on the issue of peace between Israel and Arab states, rather than on the parallel approach favored by Baker that calls for progress both on Israeli-Palestinian and regional peace. “Relations with the Arab states are more important to us,” he said.

Nevertheless, a U.S. official said of Shamir, “he did not say no to anything. Now, bear in mind that he was not asked to say yes or no to anything.”

The Palestinians, representing wide areas of the West Bank and Gaza, balked at what they perceived as pressure on them to sever links with the PLO. Throughout their talks with Baker, almost no matter what the subject, they insisted that whatever they said or did or might do would come only with the authorization of the PLO.

“I told Baker myself that we would not be meeting with him if the PLO had not ordered it,” said Saeb Erakat, a resident of the West Bank city of Jericho and a political science professor.

Aides to Baker dismissed the appeals on behalf of the PLO as “ritualistic.”

“I certainly expected the Palestinians in the territories, in the first go-round under these circumstances, that they would come in and say that the PLO is the legitimate representative, and what they heard back from us was, ‘Well, we don’t deal with the PLO,’ ” one of the aides said.

On Baker’s journey through the Middle East, he has insisted that the PLO had all but disqualified itself from peace talks because of its moral backing for Iraq’s Saddam Hussein in the war over Kuwait.

The Palestinians lobbied hard to get the PLO back into the Middle East negotiating circuit and said they would resist pressure to negotiate independent from the group. “It was my impression that Baker wants to find an alternative leadership,” said Hanan Ashrawi, a university educator and nationalist spokesman.

According to the account of several participants, Baker suggested that Saudi Arabia and Egypt might sponsor a PLO-free Palestinian negotiating team. The delegation rejected the notion. “The Arab states and the U.S. find it difficult to talk with the PLO,” noted the Palestinians’ Husseini. “But talks are not a question of whether one likes or not someone. There is no way to deal with practical steps unless the PLO is involved.”

However, Husseini and others added, Baker offered a hint of backdoor approval for PLO participation by saying the Palestinians could consult with the PLO behind the scenes.

“He said that if we want to coordinate with the PLO, that’s our business,” Ashrawi declared.

The delegation met at the pale stone residence of Philip Wilcox, the American consul in Jerusalem and go-between in setting up the talks with Baker. A cluster of right-wing Israeli protesters across the street yelled for Baker to go home, and some called Husseini a murderer.

The Palestinian group gave Baker a memorandum that amounted to an 11-point appeal for help from the world community. The note affirmed allegiance to the PLO and stood by the group’s goal of an independent state in the West Bank and Gaza to coexist with Israel. It then went on to call for the United Nations to end the establishment of Israeli settlements in the occupied land and to protect Palestinians from political repression, and it called for an end to the demolition of houses, the closure of schools and curfews.

To get peace talks under way, the Palestinians called for an international conference with the object of advancing Palestinian statehood. The PLO has long pushed for such a conference, while Israel and the United States have resisted.

Baker told the Palestinians that the Bush Administration opposes continued Israeli settlement of the West Bank and Gaza, whether it is for new Soviet immigrants or other Israeli citizens, the Palestinian participants said.

The meeting with Baker was something of a breakthrough for the Palestinians because, as Husseini put it, “the secretary was able to hear directly from us,” and also because the Palestinians had overcome their own feeling of anti-Americanism in order to show up.

Originally, twelve leaders were scheduled to meet with Baker, but two representatives of Marxist PLO factions decided to pull out at the last minute. That left a delegation largely aligned with Fatah, the main PLO faction controlled by Yasser Arafat, as well as a representative of a shrinking leftist group called the Democratic Front for the Liberation of Palestine.

Nonetheless, the Palestinians insisted there was “harmony in the Palestinian house” over the visit. All but forgotten was the ecstatic moral backing given by Palestinians to Iraq during the war over Kuwait as well as the depression and bitterness that followed the American-led victory.

The Palestinians, exhibiting nimble Levantine rhetorical skills, turned past comments by Baker back on him. Why is the Palestinian issue being linked to the Gulf War now, they asked, when Baker formerly insisted that there was no linkage? “He actually laughed when we said it,” recalled Erakat.

Palestinian observers fear that an effort to set up an alternative leadership in the West Bank and Gaza will throw their cause into disarray. Past rivalries have degenerated into killings and mayhem, they point out.

An uprising against Israeli rule in the occupied land is 40 months old and recently has been beset by severe factional disputes among PLO groups as well as between the PLO and Islamic groups.

Between his meeting with Shamir and the Palestinians, Baker sandwiched an Israeli-hosted helicopter trip north. The Israelis eagerly pointed out the narrowness of the country’s midsection and how it would be expanded if Israel was permitted to keep the West Bank.

At the Galilee town of Carmiel, Baker was greeted by flag-waving new Soviet immigrants. In a speech, he told the crowd that he hopes that the Persian Gulf War will be “the last great battle in the Middle East.”

“The storm is now over,” he said, playing on the name of the American offensive against Iraq, Operation Desert Storm.

After his meeting with the Palestinians, he laid greenery on the fresh graves of four women knifed to death by a Palestinian on the eve of his visit.