Israel's government is bracing itself for a fight over foreign aid with the Bush Administration, which officials here believe will try to press Israel to stop building settlements in the occupied West Bank and Gaza Strip by withholding American backing for huge new loans.
Government economists are already debating whether Israel can do without U.S. guarantees for up to $10 billion that Israel hopes to borrow beginning this fall. The money would be mainly used to fund new housing for tens of thousands of new Soviet immigrants flooding into Israel.
Over the weekend, Israel's ambassador to Washington cautioned that Israel must choose between expansion of Israeli settlements in the West Bank and Gaza and getting U.S. help.
"The Israeli government, when it has all the data in hand, will have to decide if it prefers settlements or aid. There will be no getting around the decision," the ambassador, Zalman Shoval, told state-run Israel Radio.
His comments sent shock waves through the government of Prime Minister Yitzhak Shamir, which attacked the idea of linking the two issues.
"It is important to clarify that the government of Israel does not believe there is any justification to link aid for immigrant absorption to taking stands on policies related to the peace process negotiations, including settlements," said a statement issued by Shamir aides.
On Sunday, Health Minister Ehud Olmert told reporters that he shares Shoval's "fear" that Washington might use aid as a lever to try to stop the settlement program. Olmert said Israel would resist any effort to tie aid to settlements.
"I don't think we have to link this, and I don't believe he intended to link this. If you don't want to be faced with such a choice, you will not be faced with it," insisted the minister, who is considered a Shamir protege.
Foreign Minister David Levy added, "We are doing everything so this linkage will not be made."
As indications that Washington may intend to forge such a linkage drifted into Israel last week, Shamir himself quickly signaled defiance.
"Creating such a linkage is dangerous," he said Wednesday, "and I hope that the American people won't accept the linkage that the Administration is trying to create between the two."
As the Bush Administration has pushed for Arab-Israeli peace talks, the issue of settlements in the occupied territories developed as a prime irritant in relations between Israel and the United States.
Washington wants to end the Israeli-Arab conflict by getting Israel to give up occupied land in return for peace treaties with Arab states and the Palestinians. This spring, during a two-month Middle East peace shuttle, Secretary of State James A. Baker III urged Shamir to stop building and expanding settlements.
Shamir maintains that the land belongs to Israel by historical right and military need and that nothing precludes his government from building new communities there. Peace is not a question of turning over land, Shamir has argued, but of getting the Arabs to end a deep-seated hostility to Israel.
To underline its rejection of a land-for-peace formula, Shamir's government permitted the establishment of new settlements on the eve of consecutive Baker visits and stepped up the seizure of West Bank land to lay the groundwork for building future enclaves.
To win U.S. guarantees for $400 million in loans last year, Israel pledged not to "direct" Soviet immigrants to the occupied area. However, cheap land and government subsidies in that area make housing there attractive to newcomers and longtime Israeli citizens alike.
About 200,000 Soviet Jews are expected to arrive in Israel this year. About the same number came last year in the wake of liberalized travel rules and fear of unrest in the Soviet Union.
In all, about 100,000 Israelis and 1.7 million Palestinians now live in the West Bank and Gaza. The government has confirmed plans to settle another 15,000 Israelis on the land during the coming year and has set up mobile homes in the region to house Soviet immigrants willing to live there.
Officials of Israel's Treasury and the Bank of Israel are sharply at odds over the need for Israel to gain more U.S. loan guarantees. Treasury officials say that Israel has enough of its own reserves to back the needed borrowing while the Bank of Israel believes that a rejection of loan guarantees by Washington would scare away international lenders.
Compared to conventional borrowings, interest is lower and the payoff time is stretched out longer for loans backed by the U.S. government. Israeli newspapers reported last week that Germany may also withhold $1 billion in grants and loans earmarked as aid for Soviet Jewish immigrants to Israel if the settlement program continues.
The Shamir government is banking on the American Congress to overcome the Bush Administration's objections to the settlement program.