Israel Endangers Talks, U.S. Says : Mideast: Baker and Shamir fail to agree on terms for $10 billion in loan guarantees. Bush is inclined to press for a freeze on settlements, senior official indicates.

The Bush Administration turned up the heat on Israel on Tuesday after the two governments failed to agree on terms for $10 billion in U.S. loan guarantees, with a senior official charging that the government of Prime Minister Yitzhak Shamir is endangering Secretary of State James A. Baker III’s drive for Arab-Israeli peace talks.

The Shamir government appeared resigned to a delay in aid support from the United States and sought to reduce the public conflict with the Bush Administration over the issue. Shortly after Baker departed for Egypt, Foreign Minister David Levy said Israel now will focus on ensuring that, down the road, it gets the loan guarantees to fund needed housing and jobs for Soviet immigrants.

But a senior Bush Administration official said, “I don’t want to indicate one inch of flexibility” in the U.S. position on the aid, deliberately escalating the pressure on Shamir.

The senior official, who spoke to reporters on Baker’s Air Force plane en route to Cairo after two days of meetings in Israel, indicated that Baker and President Bush are now inclined to press strongly for a freeze on Israel’s construction of Jewish settlements on occupied Arab territory, the key issue underlying the debate over loan guarantees.

The official implied--but did not say explicitly--that the Administration would resist providing the loan guarantees without a firm halt to Israel’s settlement effort--something the United States has long sought without success.

“What they (the Israelis) want us to do is to agree that come January, we would not ask for any conditions on this aid respecting their continued settlement practices,” the senior official told reporters, “But that’s just something we’re not going to agree to.”

If the Administration attempts in January to block the loan guarantees unless there is a settlement freeze, it would be the first time United States has imposed such an explicit price for its aid to Israel.

The official indicated that the Administration would blame Israel if the dispute leads to a breakdown of the peace conference that the United States hopes to convene in October.

If the United States gives Israel the loan guarantees now, he said, “I’m quite confident the Arabs would not show up (at the conference)--and who would blame them?” He added that President Bush is ready and willing to “go to the American people” to take on Israel over the issue.

The net result was a continuation of the worst U.S.-Israeli spat since Israel’s 1982 invasion of Lebanon--and at least a temporary blow to hopes for a peace conference at which Israel and its neighbors could try to end their 43-year state of hostility.

The Administration has proposed delaying the congressional debate over the loan guarantees until January. Israel, its budget hard-pressed by a flood of Jewish immigrants from the Soviet Union, has asked for them immediately.

The United States has tried repeatedly to stop Israel from building new settlements in the West Bank and Gaza Strip, because--in the American view--they make it more difficult to negotiate a compromise over the territory.

But Israel has ignored the U.S. complaints. Colonization of the West Bank and Gaza is viewed by the Shamir government as a means to guarantee Israeli control of the territories. Bush wants Israel to surrender at least part of the land, in exchange for recognition from Arab states and peace with the Palestinians. Israel is asking that the United States provide the loan guarantees without any conditions that would prevent Shamir from using the money for new settlements.

“The discussion is not over the delay--three or four months,” Levy said. “Our main discussion is on how to ensure that the aid will, in fact, be given.”

Israel will campaign to divorce the aid issue from the question of progress in peace talks, Levy and other Israeli officials said. Concluding that the loan guarantee will not be approved until January at the earliest, Levy said, “Our intention is to avoid the danger of confrontation.”

But Israel Radio interpreted Levy’s comments as an admission that Israel has “already given up” in its face-off with Bush.

A senior Israeli official said Israel will sit back and await the outcome of compromise proposals under consideration in the U.S. Congress.

Meeting with reporters around a conference table on his airplane at Israel’s Ben-Gurion Airport shortly before leaving for Cairo, Baker outlined details of a six-point U.S. compromise proposal.

If Shamir agrees to delay his request, he said, the Administration would: pledge to work with Congress to obtain the loan guarantees in January; promise to ask for no further delay; reaffirm its support for U.S. aid to help Israel absorb the costs of absorbing Soviet immigrants; promise to lobby other governments to provide similar aid; compensate Israel for any financial loss it suffers as a result of the delay, and decide how much to charge the U.S. federal budget for the guarantees “in the most reasonable possible way.”

“We will see how things develop between Congress and the President,” a senior Israeli official said.

He described proposals that Baker made to Shamir during two days of meetings as “damn forthcoming” and complained: “We haven’t really gotten back anything that I would characterize as forthcoming.

“We feel extraordinarily strongly” about the issue, he added with an unusually fervent edge. “I think the President will be willing to go to the American people (to argue the issue) because it is their tax dollars that will be supporting settlement activity that we used to characterize as illegal--and which we now moderately characterize as an obstacle to peace,” he said.

(Although the guarantees will not cost the taxpayer if Israel repays the loans, U.S. law requires the Treasury to set aside some money to cover the possibility of a default. Israel and its supporters want that amount to be relatively small--perhaps $1 billion, the official said--to make it easier for Congress to approve the guarantees.)

The senior U.S. official’s comments indicated more strongly than previous Administration statements that Bush will ask for strict conditions on the guarantees to prevent Israel from using the loans for building in the occupied territories.

Much of Bush and Baker’s irritation over the Israeli position stems from their experience earlier this year, when the United States provided $400 million in loan guarantees--and Israel immediately began building new settlements, despite a formal promise from Levy that the money would not be used for that purpose.

Asked whether the dispute might prompt Israel to back out of the peace talks, the official replied: “We’re doing here what we strongly believe is right--and if that means that they decide not to come or somebody else decides not to come, so be it.”

But he said he does not believe Israel would refuse, because it would “not look good” to block peace talks over such a narrow issue.

He said every Arab government had asked Baker to force Israel to freeze its settlement program as a condition for peace talks, but Baker refused--partly because he believed Israel would never have agreed to that demand. Israel’s Arab neighbors--Egypt, Syria, Lebanon and Jordan--agreed to attend the talks anyway, he noted.

But if the United States went beyond that to guarantee $10 billion in Israeli loans without any conditions on settlement construction, “it is my judgment that the Arabs will walk. . . . They won’t come to the table,” he said.

There has been no indication that Israel will stop building settlements, though Harry Wall, director of the Israel office of the Anti-Defamation League, commented: “There’s no question, if expansion of settlements was frozen, the aid would flow.”

Later Tuesday, Baker met in Cairo with Egyptian President Hosni Mubarak, who reaffirmed his desire to join the Mideast peace talks and said the settlement issue should be part of the negotiations.

Earlier, the senior U.S. official, who is intimately familiar with Baker’s thinking, testily dismissed reports that the secretary of state and the President have disagreed over how to pursue the peace conference. Some officials had said that Baker opposed Bush’s decision to take a hard line against Israel in his public statements last week.

“The truth of the matter is everything that we have done, each of us, has been done by agreement between us,” the official said. “Whoever it is that might be peddling the idea somehow that (Baker is) on a different wavelength from the President here is full of horse-hockey.”

Despite the apparent hardening of the two sides’ positions, however, they made a deliberate effort to appear cordial--to try to keep the confrontation from spiraling out of control.