U.S. Loan Guarantees to Israel Would Be a ‘Major Obstacle to Peace,’ Syria Says : Mideast: Damascus praises Bush for delaying the step. It has become the focus of a major debate with Washington over settlement policy.

The Syrian government warned Wednesday that it would consider a U.S. decision to guarantee $10 billion in housing loans to Israel “a major obstacle to peace” because it would encourage the construction of new Jewish settlements in occupied Arab territories.

But Foreign Minister Farouk Shareh did not threaten to boycott a U.S.-promoted Arab-Israeli peace conference if the loan guarantees are granted, contrary to the predictions of some U.S. officials.

After six hours of meetings between Secretary of State James A. Baker III and Syrian President Hafez Assad, the Syrian foreign minister praised the Bush Administration for its decision to seek a 120-day delay in the loan guarantees, which have become the center of a major debate over Israel’s settlement policy.

“We consider a delay in the assurances by President Bush is genuinely a reflection of the Administration’s seriousness to achieve peace in the region,” Shareh told reporters, referring to the loan guarantees.

“If the United States . . . granted the loan (guarantee), then that would be a major obstacle to peace, certainly,” he said.

But Shareh ducked a question on whether the loan guarantees would prompt Syria to boycott the peace conference that Baker has been working to arrange. A senior U.S. official traveling with Baker had told reporters Tuesday that he believed Syria and other Arab states would refuse to attend if the United States granted the guarantees without imposing conditions on Israel’s settlement policy.

The loan guarantees have become the center of a major dispute because Israel’s government has announced plans to build thousands of new housing units for Jewish settlers in the occupied West Bank and Gaza Strip, a policy strongly opposed by both the United States and the Arabs, who say it would cement Israel’s 24-year-long military occupation of the overwhelmingly Arab areas.

Israel has asked for the loan guarantees to help it gain financing at lower interest rates to build housing--it does not specify where--for more than 300,000 Jewish immigrants who have arrived from the Soviet Union over the last few years.

The senior U.S. official who briefed reporters on Baker’s Air Force jet Tuesday suggested that the Administration would not grant the guarantees unless Israel freezes further construction of settlements.

“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,” the official said.

But Baker, referring to those comments, told reporters that he has never explicitly linked the U.S. demand for a freeze on settlement expansion with the provision of loan guarantees or other aid to help Israel absorb new immigrants.

“I have not discussed, either publicly or privately, a settlement freeze in connection with the question of absorption aid to Israel,” he said. “We have asked for a delay (in granting the guarantees) in order to avoid a question of linkage, not promote it.”

His comment was clearly aimed at softening the impact of the senior official’s earlier statement, which had come close to a flat declaration that the Administration would hold up immigrant aid as a lever to win a settlement freeze.

Bush and Baker still want to keep that threat implicit, not explicit, officials indicated. The main reason, they said, is that Baker hopes to avoid a bruising debate over fundamental issues of the Arab-Israeli conflict--such as the settlements--until the peace conference is under way.

But that tactical battle appears to have been lost, at least for a time, since Israel and every other party in the area quickly recognized that the loan guarantee issue was inextricably tied to the settlement issue.

Even when the Administration chose to seek a 120-day delay in the guarantees rather than block them entirely, that issue became a test of the U.S. resolve to act against settlements.

In his lengthy meeting with Assad on Wednesday night, Baker also presented the Syrian president with a formal “letter of assurances” detailing the U.S. view of the basis for a peace conference.

Among the assurances, Baker said, was one stating that the United States believes that the U.N. Security Council resolutions calling for Israeli withdrawal from occupied Arab territories apply to the Golan Heights, which Syria claims, as well as the West Bank, Gaza Strip and East Jerusalem.

Syria’s Shareh said Syria may seek amendments in the assurances, and he repeated Syria’s view that the U.N. resolutions require Israel to withdraw from all lands it occupied in the 1967 Mideast War.