Summit Endorses U.S. Mideast Peace Initiative : Diplomacy: Group of Seven urges Israel to halt new settlements, calls on Arabs to end their boycott.

Leaders of the major industrial democracies, declaring the new U.S. peace initiative in the Middle East a matter of “overriding importance,” called Tuesday for suspension of both the Arab economic boycott against Israel and the Israeli policy of building settlements in the occupied territories.

In a firm endorsement of the American plan for opening Arab-Israeli peace talks, which Secretary of State James A. Baker III will promote in a whirlwind tour of the Mideast beginning Thursday, leaders attending the economic summit said it “offers the best hope of progress toward a settlement.”

American officials are counting on the positive response Syrian President Hafez Assad has given to the U.S. plan to put pressure on Israel to compromise and thus open opportunities for moving toward direct talks between the two sides.

Although Bush and Baker have hailed Assad’s letter as positive and a breakthrough in the long-running attempts to bring peace to the region, officials in Jerusalem have dismissed it as a ploy to pin blame on Israel for the failure of the peace process. And they have said they continue to oppose the American plan.

Baker will first visit Syria, then three other Arab countries--Jordan, Egypt and Saudi Arabia--before winding up his trip in Israel. The itinerary was planned that way to try to forge Arab unity and bring international pressure on Israel to be more receptive when Baker arrives.

“To the extent (Baker) is able to bring the Arabs together, there will be a major source of pressure on Israel it has never faced before,” said a senior Administration official who declined to be identified.

The summit leaders took up the Mideast question in a political declaration that also endorsed continuing economic sanctions against Iraq, called for strengthening the United Nations’ hand in dealing with crises and addressed several other subjects.

They urged that all parties to the Arab-Israeli dispute adopt “reciprocal and balanced confidence-building measures” and show “the flexibility necessary to allow a peace conference to be convened on the basis set out in this initiative.”

“In that connection,” the statement continued, the Arab boycott against Israeli products and companies doing business in Israel should be suspended, “along with the Israeli policy of building settlements in the occupied territories.”

The so-called G-7 leaders--representing the United States, Britain, Germany, France, Italy, Japan and Canada--specifically endorsed the “concept of a (Mideast) peace conference starting parallel and direct negotiations between Israel and representative Palestinians on the one hand and Israel and the Arab states on the other,” as called for in the American peace proposal.

The U.S. proposal would provide for a general peace conference between Israel and its Arab neighbors that would be held under American and Soviet auspices, with the United Nations as a silent observer. After the general conference, Israel would be expected to hold bilateral talks with each of the Arab countries and with representatives of the Palestinians.

Israeli officials reacted coolly to the proposal to link a halt to the settlements to an end to the Arab boycott. “There is no connection between the two things,” said a statement issued by Prime Minister Yitzhak Shamir’s office.

“The problem of settlements is very complex and belongs to the type of problems which will be raised and discussed when the negotiations between Israel and the Arab states open,” the statement continued.

In any event, Israeli officials said, to stop the building of settlements before peace talks would make the results of negotiations a foregone conclusion. Israel would be giving up land without getting to offer its own proposals. The Shamir government wants to offer limited self-government to the Palestinians who live there while keeping control of the West Bank and Gaza.

The Shamir statement went on to call for the Arabs to unilaterally end the boycott--which provides for blacklisting of companies that deal with Israel--and for other countries to resist the boycott by forbidding firms to adhere to it.

Expansionists in the Shamir government fear that peace talks will put an end to the stepped-up settlement program. Housing Minister Ariel Sharon has put into operation plans to construct 15,000 houses in the disputed land in the next two years. Shamir himself has called the settlement program unstoppable.

Baker, during his previous visits to Israel, proposed that Israel stop developing settlements as a confidence-building measure. He was answered with the sprouting of new communities, additions to old settlements and land seizures meant to lay the groundwork for future construction.

Baker refused to comment Tuesday on Israel’s continuing opposition to the American proposal and to its dismissal of Assad’s letter, except to assert once again that the new Syrian position is a positive development and that “it’s fair to say that we have the possibility of seeing direct bilateral negotiations between Israel and at least some of her Arab neighbors.”

The summit will end today with a broad economic declaration, followed by talks with Soviet President Mikhail S. Gorbachev, who was invited by the summit host, Prime Minister John Major, to discuss Western aid to shore up the failing Soviet economy.

The leaders, who have been meeting annually for 17 years, emphasized the importance of political issues that have come to dominate the summits by issuing a political declaration separate from the economic document.

In it, they promised to maintain sanctions against Iraq “until all the relevant resolutions of the (United Nations) have been implemented in full, and the people of Iraq, as well as their neighbors, can live without fear of intimidation, repression or attack.”

British Foreign Secretary Douglas Hurd emphasized the determination of the summit nations to keep Iraq from developing nuclear weapons, declaring that the leaders will support “whatever action is needed,” a reference to the U.S. threat to mount air strikes against Iraq’s nuclear facilities.

And the political statement said the United Nations should be ready to consider “similar action in the future if the circumstances require it.”

A major theme of the declaration is strengthening the United Nations to carry forward the once-ineffectual organization’s successful response in the Gulf War.

The G-7 urged a “new spirit of cooperation not only in the Middle East but wherever danger and conflict threaten or other challenges must be met.”

The leaders called for reinforcing the U.N. role in peacekeeping and for “preventive diplomacy” to avert future conflicts by “making clear to potential aggressors the consequences of their actions.”

They also recommended that the United Nations appoint a high-level official to a post that would direct fast international responses to worldwide emergencies and disasters so that the United Nations would then be able to “take the early action that has sometimes been missing in the past.”

In a separate declaration, the G-7 leaders called for controlling arms shipments to areas that would be destabilized by additional weapons and said the United Nations should set up a register of arms transfers to keep tabs on the world arms trade.

“Such a register,” said the statement, “would alert the international community to an attempt by a state to build up holdings of conventional weapons beyond a reasonable level.”

In other areas, the government leaders committed themselves to “full support” for market reforms and democracy in Eastern Europe, as well as in the Soviet Union.

As for the Yugoslav crisis, they said, “It is for the peoples of Yugoslavia themselves to decide upon their future.”

The leaders endorsed the right of self-determination, which might please the breakaway republics of Slovenia and Croatia, but also backed U.N. provisions supporting the territorial integrity of nations--which seemed to support the Serbian position on maintaining the Yugoslav federation.

Referring to South Africa, the summit leaders said that recent reforms show that that country “needs the help of the international community, especially in those areas where the majority have long suffered deprivation: education, health, housing and social welfare. We will direct our aid for these purposes.”

Tuesday night, with the day’s business over, the seven leaders assembled at Buckingham Palace for a banquet given by Queen Elizabeth II. Before dinner, they posed for a formal photograph with the monarch.

Among the guests were Prince Philip, the queen’s husband; Prince Charles and Princess Diana, and former Prime Ministers Edward Heath, Lord Callaghan and Margaret Thatcher.

Afterward, the guests saw a fireworks and laser display and performances by bands of the queen’s guards.

Times staff writer Daniel Williams, in Jerusalem, contributed to this story.

BACKGROUND

No economic sanctions have lasted longer than the Arab League’s boycott of Israel. Under the primary boycott, adopted in 1946, Arab states refuse to buy from, sell to or otherwise deal with Israelis. A secondary boycott has been supported by more than half the 21 Arab members since the early 1950s. Arabs refuse to deal with companies that have factories, agencies or offices in Israel; have trademarks or copyrights belonging to Israeli companies; use Israeli consultants; use shipping firms whose ships call on Israeli ports, or deliver oil to Israel. Companies considering business in the Middle East choose between trade with 4.6 million Israelis or 180 million Arabs.