Bush Asks Congress to Put Israeli Loan Issue on Hold : Mideast: President says he wants to ‘give peace a chance.’ Action stirs anger in Jerusalem.

In an extraordinary challenge to Israel and its American supporters, President Bush on Friday urged Congress to “give peace a chance” by putting aside until the end of the year an Israeli request for $10 billion in housing loan guarantees.

The blunt demand for delay rebuffed Israel’s plea for more rapid action and set off immediate explosions in Jerusalem and on Capitol Hill.

Israel wants the money to build houses for an influx of Jewish immigrants from the Soviet Union. But with hopes for Middle East peace riding on U.S.-brokered negotiations that the Administration wants to start next month, Bush warned that to open a bitter public airing of the loan guarantee legislation would risk “clouding the waters just at a time the waters are beginning to clear.”

“This is not the time for a debate that can be misunderstood, a debate that can divide,” Bush said. “We will take no chance of unraveling a peace process that offers us the best hope for peace in decades, literally decades.”

The housing loans are controversial because of Administration fears that the funds would be used to expand Jewish settlements in the occupied West Bank and Gaza Strip. Secretary of State James A. Baker has said there is no bigger obstacle to peace than continued Israeli settlement activity.

The President made the announcement only after he and Baker III had spent several days imploring key members of Congress to postpone action for at least 120 days. In the course of its high-pressure lobbying, the Administration threatened to label as irresponsible those who would act quickly.

Among those persuaded to stand behind the Administration position was Sen. Patrick J. Leahy (D-Vt.), chairman of the subcommittee responsible for the loan legislation. Leahy made clear he had been won over by the President’s plea that a delay could “help the chances for peace in the Middle East.” And Senate Foreign Relations Committee Chairman Claiborne Pell (D-R.I.) predicted that Congress would ultimately agree to the delay.

But there were signs of fierce resistance that portended a bruising fight ahead as Israel and its supporters defend the “humanitarian” purpose of the U.S.-backed loans.

Insisting that “this issue should not be linked to the peace process,” Sen. Alan Cranston (D-Calif.) declared: “We should approve Israeli housing loan guarantees without delay.”

Rep. Charles E. Schumer (D-N.Y.), a leading advocate of Israel, insisted that Soviet Jewish immigrants should not be subjected “to the vicissitudes of Middle East peace.”

State Department spokeswoman Margaret Tutwiler said the proposed delay was intended to sever any linkage between the housing guarantees and the proposed peace conference.

“If the $10-billion issue is raised now, others are bound to raise all sorts of questions about how and where this money is going to be used,” Tutwiler said. “We are seeking to avoid that linkage so that we don’t undercut our ability to launch peace negotiations.”

However, Israel and its U.S. backers argued that the Administration’s real purpose is to force Israel into concessions in the peace negotiations in exchange for money needed to house the largest influx of new immigrants since the early years of the state.

Israeli Foreign Minister David Levy defiantly said that his countrymen would live on “bread and salt” rather than accept aid that was tied to action that might undercut the nation’s security.

Israel, Syria, Egypt, Jordan, Lebanon and the Saudi Arabian-led Gulf Cooperation Council have agreed in principle to attend a peace conference under the co-chairmanship of the United States and the Soviet Union. Bush and Soviet President Mikhail S. Gorbachev said at their July summit that they hoped to begin the conference in October.

However, it is becoming increasingly doubtful that the session can begin that soon. The political upheaval in the Soviet Union has diverted Moscow’s attention from Middle East peace, and some important issues--especially Palestinian representation--have not yet been resolved.

Baker said he hopes to complete arrangements for the conference during a visit to the Middle East at mid-month.

Bush called for the delay just hours before Israeli Ambassador Zalman Shoval delivered the Jerusalem government’s formal request for the U.S. Treasury to underwrite private loans to Israel. The plan would cost the American taxpayers nothing as long as Israel repays the loans. But without the U.S. guarantees, Israel’s credit rating would not be good enough to borrow so much money at affordable rates of interest.

Shoval planned to go directly from the State Department to a press conference that would have given him a chance to protest the Administration’s call for delay. But following a meeting with Baker that ran well beyond its scheduled time, the Israeli ambassador canceled his separate press conference and, instead, spoke briefly with reporters with Baker at his side.

Shoval sought to quiet the controversy, predicting that Israel would ultimately get the money. It seemed likely that Baker had warned the ambassador that bitter recriminations would be counterproductive to the Israeli cause.

For his part, Baker said, “What we don’t want to have happen is to for any reason lose the best opportunity for peace in a long, long time. . . . Let’s give peace a chance, even if it’s only for 120 days.”

However, Bush did not say whether the Administration would support the housing loan program at the end of the four-month period.