Israeli Panel Clears Grant for Settlements : Mideast: Plans are being made to create a new Jewish neighborhood in the heart of contested East Jerusalem.

A day after top Israeli officials rebuffed U.S. calls for a freeze on settlement construction, a parliamentary committee Friday approved a special grant of $6.5 million for projects in the occupied West Bank and Gaza Strip, while opponents of the program claimed that Israel will spend $2 billion next year to develop the contested land.

Plans are also being made for a new neighborhood in the heart of Palestinian districts in East Jerusalem, apparently to bolster the claim of Israel to the entire city.

The funding vote, termed by proponents “nothing to get excited about,” follows a pattern of answering appeals from the Bush Adminstration for suspension of settlement expansion with some move to accelerate the campaign. The vote by the finance committee had originally been scheduled for Monday, when Secretary of State James A. Baker III visited Israel. It was postponed, Israel radio said, because the timing was viewed to be “unpolitic.”

Pro-settlement politicians in the government of Prime Minister Yitzhak Shamir made no effort to hide the message behind the vote.

“Seven million dollars is small money,” declared Mikhail Eitan, a member of Shamir’s Likud Party. “It’s only ridiculous that politicians are making noise and a big issue of this case.”

The money will be used to promote industry and tourism.

Asked about reports that Israel will spend up to $2 billion next year in the territories, Eitan responded: “We have our own policy, and our policy is that Jews are allowed to settle everywhere. They are allowed to settle in Europe, in the United States and, of course, they are allowed to settle in their own land, the Land of Israel, and no one will dictate a prohibition on Jewish settlement here.”

The minority Labor Party, which led a fight against the vote, said the $2-billion figure comes out of Treasury Ministry documents. Labor members pointed out that $2 billion is the amount that Israel wants to borrow next year to house and provide jobs for Soviet immigrants.

“To invest more money in the settlements is close to insanity,” said Labor Parliament member Haim Ramon.

U.S. officials have linked American guarantees for loans to Israel with a freeze on settlements. It is not clear that construction in Jerusalem is included. Washington does not recognize the Israeli annexation of Arab areas but also does not oppose the right of Jews to live anywhere in the city.

The new planned neighborhood will slice between two established Palestinian neighborhoods, cutting across a 7 1/2-acre olive grove.

A top aide of Shamir’s, Yosef Ben-Aharon, expressed concern that the United States might prevail on other countries to withhold aid for Israel to press for a settlement halt. His remarks, broadcast on radio, followed a local newspaper report that President Bush convinced German Chancellor Helmut Kohl to delay $5 billion in loan guarantees to Israel.

“I don’t at all rule out that the United States has requested states to deny us aid at this stage in order to bring pressure. I hope it’s not true,” Ben-Aharon said.

Splits appeared to be developing in the Shamir government over the wisdom of the stepped-up pace of settlement development.

Finance Minister Yitzhak Modai, who is usually a staunch advocate of expansion, believes the pace should slow. “We shouldn’t try and anger the Americans,” he told an Israeli newspaper. “Accelerated building in the territories as a deliberate provocation against them is an act of stupidity of the highest order.

“Everyone watches what America does, how it relates to us,” he said. “Therefore, the rejection of the guarantees could harm our ability to obtain funds from abroad. An awful blow like that would be very hard to withstand.”

Modai complained that he is kept in the dark about plans for settlement expansion.

A compromise formula circulating among Likud politicians and in newspapers calls for Shamir to repeat former Prime Minister Menachem Begin’s offer--made during the Camp David peace negotiations with Egypt in the 1970s--to freeze development of new settlements for three months as a gesture to ease autonomy talks with Palestinians.

Shamir is reportedly balking at taking such a step.

“It must be noted,” wrote Avner Regev in the liberal Al Hamishmar newspaper, “that Shamir expresses intense rage whenever Begin and his willingness to freeze settlements for three months are mentioned. His aides regularly emphasize that Shamir is not Begin, and, therefore, he will also refrain from the same ‘mistakes’ made by the former prime minister.”

Defense Minister Moshe Arens added his personal negative to the list of government officials rejecting an end to settlements. “The answer to that is no,” he said in Tel Aviv. “We are not considering freezing settlements.”