Kidnapers Offer to Swap All Hostages : Mideast: Islamic Jihad seeks hundreds of Arab prisoners but fails to mention 7 Israelis. Bush derides letter; others see ‘positive aspects.’

In a florid and emotional letter derided by President Bush as grist for “the rumor game,” a Muslim fundamentalist group offered to exchange the 10 remaining Western hostages in Lebanon for “the release of our freedom fighters from prisons” in Israel and Europe, the United Nations announced Monday.

The letter from Islamic Jihad was carried out of captivity by freed British hostage John McCarthy and turned over to U.N. Secretary General Javier Perez de Cuellar on Sunday. As requested by the group, its contents were made public, at U.N. headquarters in Geneva.

Despite the President’s tart comment, White House Press Secretary Marlin Fitzwater said, “Our preliminary analysis suggests there may be some positive aspects to the letter.”

Others found glimmers of hope, as well. Perez de Cuellar, who met with two Israeli officials Sunday evening and conferred with French Foreign Affairs Minister Roland Dumas on Monday, told reporters that the letter made him “a little more hopeful than before because we have very concrete evidence that those who hold the hostages are more interested in a solution.”

Asked if he thinks an end to the hostage crisis is near, the secretary general replied: “I would not say near, but nearer than before.”

It was clear that Perez de Cuellar, who is taking a central role in the diplomatic maneuvering over the hostages, drew his optimism from the mood of the letter rather than its proposals. The Shiite Muslim fundamentalists, in their long letter, never mentioned the main sticking point in negotiations--seven missing Israeli servicemen. And the letter seemed to increase the captors’ demands by calling for the release of prisoners in Europe, presumably including two terrorists held in Germany.

In other developments in the complex hostage drama:

* Edward A. Tracy, the released American hostage, was reunited with his son, Lawrence, during a pizza dinner at the American military hospital in Wiesbaden, Germany. Although Tracy spent most of his first full day of freedom undergoing a series of medical examinations, doctors talking with reporters were evasive about the emotional toll exacted by Tracy’s ordeal and his possible need for psychological care.

* Israel, a vital player in any deal for release of the hostages, stuck to its demand for the return of its missing servicemen--or at least their bodies. Yet, instead of dismissing the Islamic Jihad letter as deficient, Defense Minister Moshe Arens said: “The fact that this organization of the extreme Shias says it is ready to reach a deal, and that the secretary general has come into the picture, gives an opening for hope.” But other officials said they were disappointed about failing to receive any assurance about the servicemen from Perez de Cuellar.

The Islamic Jihad letter thrust the United Nations onto the stage as the most visible mediator trying to bring about a release of the remaining hostages. While Perez de Cuellar, in Geneva on U.N. business, conferred with envoys and diplomats about the problem, his trusted assistant, Giandomenico Picco, reportedly shuttled between Damascus, Syria, and Beirut, evidently trying to make contact with the kidnapers.

The lengthy letter from Islamic Jihad, replete with ideological rhetoric, compressed the heart of its business into one paragraph.

Although Islamic Jihad reportedly holds only three hostages, including Terry A. Anderson, the American who has been in captivity longer than any other, the organization made it clear that it could talk for the other bands of kidnapers as well. All are believed linked within a larger movement known as Hezbollah, the Party of God, an organization of Shiite Muslims who believe fervently in the teachings of the late Ayatollah Ruhollah Khomeini of Iran.

Outlining a far-reaching exchange, the letter to Perez de Cuellar said: “In view of our belief in the need for action to secure the release of our freedom fighters from prisons in occupied Palestine (Israel) and Europe and also to solve the question of the detainees whom we are holding and the problem of their families, we call upon you to make a personal endeavor, within the framework of a comprehensive solution, to secure the release of all detainees throughout the world.

“In such an eventuality,” the letter went on, “we would be perfectly willing to complete the process that we began today and to release the persons whom we are detaining within 24 hours.”

The group’s outline of a solution posed some obvious difficulties. It is understood that the kidnapers--and their Iranian supporters--have made it clear that the hostages would be released if Israel and its Lebanese Christian allies released 375 Lebanese and Palestinians held in southern Lebanon and an abducted Shiite fundamentalist leader. But Israel has refused to do so until the seven captured Israeli servicemen, several of whom are presumed dead, are either freed or accounted for.

In the letter, Islamic Jihad made no mention of the Israeli demand. And it raised another condition of its own by citing the Shiite extremist prisoners in Europe. At least 10 are now imprisoned in Germany, Switzerland and Spain for terrorist crimes.

In Kennebunkport, Me., where he is vacationing, President Bush told reporters that he had spoken with White House aides about the letter at 5 a.m. About to start on an early morning round of golf, the President characterized the letter in a disdainful way: “Back in the rumor game--broad-demand game. Release people all around the world. We--nobody--quite knows what that means.”

But Fitzwater, his spokesman, was more upbeat when talking with the media a few hours later. “It clearly calls upon the secretary general, who we know and trust, and the United Nations to remain active on this issue,” he said. “And it discusses a readiness to release all hostages. Those are positive aspects to the letter.

“Obviously,” he went on, “this letter is the basis for discussion by many, many people around the world.”

There was a strange contradiction in the Islamic Jihad letter. The Shiite fundamentalists made it clear that they had chosen Perez de Cuellar as a mediator because of “the great importance of your role and position as secretary general of the United Nations in the eyes of the peoples of the world, particularly the oppressed and downtrodden peoples.”

Yet, Islamic Jihad devoted more than a third of the letter to an excoriating attack on the United Nations for failing to stand up for justice, especially for what was termed its failure to protect the rights of Palestinians.

The group told Perez de Cuellar that the United Nations is “a plaything in the hands of the superpowers, particularly America, the Great Satan, since your organization has become merely a cover to protect the interests of world imperialism and suppress the movement of the oppressed peoples yearning for the achievement of their independence.”

In another long digression, Islamic Jihad proposed that Perez de Cuellar use his influence to persuade the United Nations “to adopt Islam as an ideology, a code of law and a system and to follow the teachings of the Great Imam Khomeini.”

Once Islam is “applied as a firm basis for the solution of all the problems of human societies,” the kidnapers suggested, the United Nations should “put an end to the hegemony of the superpowers” by abolishing “the iniquitous right of veto, which is rightly regarded as worse than the law of the jungle.”

Islamic Jihad, in its letter, also justified its kidnapings as natural outgrowths of its war with the United States and Israel: “The question of detainees and prisoners in the world today is one of the consequences of the confrontation between us and the forces of international arrogance led by America, the mother of iniquity throughout the world, and its offspring, Israel.”

Times staff writers James Gerstenzang in Kennebunkport, Tamara Jones in Wiesbaden, Daniel Williams in Jerusalem and Marlene Cimons and Robin Wright in Washington contributed to this report.