NEWS ANALYSIS : Loan Issue Draws U.S. Into Israel’s Election : Mideast: Shamir aides criticize Bush Administration. It ‘wants to help Rabin,’ Jerusalem paper suggests.

The breakdown in Israeli efforts to get American help in obtaining economic development loans took root Sunday as a hot topic in the election race here between incumbent Prime Minister Yitzhak Shamir and his chief opponent, the more dovish Yitzhak Rabin.

The rapid movement of the issue from the diplomatic to the electoral battlefield highlights the importance relations with the United States will have in this June’s Israeli elections.

Members of Shamir’s rightist government criticized the Bush Administration for demanding a stop to Israeli building in the occupied West Bank and Gaza Strip as a condition for U.S. guarantees for the loans. The loans are meant to spur employment for hundreds of thousands of new immigrants from the former Soviet Union.

Shamir’s Likud Party is ideologically committed to settling the territory so that no part can come under de facto Palestinian control.

Health Minister Ehud Olmert, who frequently stands in publicly for Shamir on controversial issues, said that Secretary of State James A. Baker III is trying to strip Israel of all land won in the 1967 Middle East War. “I’m afraid the present attitude of the American secretary of state may lead to a total disagreement on the loan guarantees,” Olmert said.

In an analysis, the pro-government Jerusalem Post suggested that elections are the key to the loan delay and that President Bush wants to defeat Shamir. The paper quoted an official close to Shamir as saying, “It is difficult to prove, but I think the Administration wants to help Rabin.”

Until recently, Shamir had been expected to run on a settlement-and-loan guarantee platform, confident that he could get the money and keep on building. With the loan guarantees on hold, Shamir appears ready to accuse the United States of interfering in Israeli affairs and harming a humanitarian effort to ease conditions for the immigrants.

The opposition Labor Party, Likud’s major rival in the elections, swiftly began to distill its own settlement policy. Rabin, Labor’s candidate for prime minister, argued that it is permissible, despite American complaints, for Israel to build settlements in the occupied land--but only for security reasons.

Security construction includes communities in the deep valley bordering Jordan, the area around Jerusalem and on the Golan Heights, which Israel won from Syria in the 1967 war.

In effect, Rabin appears to be running on a security-and-loan guarantee platform, suggesting he can get the money as long as Israeli settlement policy is reasonable and linked only to defending its borders and capital city.

According to Rabin, Likud’s wide-ranging construction policy, which he called “political,” is wasteful. “We will halt political settlements out of Israeli considerations whether it is linked to a loan from the United States or not,” he said. The money Likud has spent would be better used for immigrant needs, he argued.

In an apparent effort to show he is no patsy for Washington, Rabin rejected suggestions that the Bush Administration, by putting tough conditions on settlement expansion, is helping his campaign. “It’s desirable that no foreign element get involved in any internal matter of the state of Israel,” he told a radio interviewer.

Last week, a third round of loan guarantee talks between Baker and Zalman Shoval, the Israeli ambassador to Washington, stalled over the settlement issue. Baker demanded a halt to new settlement construction and proposed penalizing Israel financially for completion of 6,000 houses currently under construction.

Shoval countered with a proposal to freeze government financed housing after a total of 13,500 units were completed, without penalty. Thereafter, only government-financed building would be penalized. Privately financed construction could continue.

Israel has asked Washington to co-sign a $2-billion loan request this year and a further $8 billion over the next four years. The support would enable Israel to borrow at reduced cost. The United States would pay in case of default.

Shoval expressed surprise at Baker’s position, although in comments last year, he himself warned that Israel would have to choose between settlements and loan guarantees. “I was expecting, like in any process of compromise, that the other side would go at least some way to meet our stand,” he said on government radio.

He asserted that Israel is being forced to choose between immigrant well-being and Israel’s existence. “The dilemma of Israel right now is that . . . it is as if we were expected to take a decision between the safety of our compatriots in the Soviet Union now and the safety of the country in the future,” he said.

Both the loan-guarantee diplomacy and election campaign are being played out against the backdrop of Middle East peace talks, due to resume in Washington today. For the first time, an American administration is putting teeth into its belief that settlement expansion is an obstacle to peace.

Observers here and in Washington attribute the toughened U.S. stand to a desire by Bush to impress Arab partners in the talks with U.S. willingness to enforce Washington’s own anti-settlement policy. In addition, settlements stand in the way of the well-worn American peace formula in which Israel would surrender occupied land in return for security arrangements and peace treaties with its Arab neighbors.

“Bush wants to prove to the Arabs that he is different, and the loan guarantee stand is a sign in this direction,” according to William Quandt, a Middle East expert at the Brookings Institution in Washington.

It is unlikely that Bush is unaware of the political echoes the delay on the guarantees will cause, Quandt added in a recent interview. “There is a longing for some sort of alternative government in Israel. Bush wants to make Israel think about its priorities,” he said.

Shamir opposes the land-for-peace formula. Rabin has indicated a willingness to surrender some land.

There is some question whether today’s round of peace talks will produce much more than the posturing that dominated previous rounds. Israeli officials have indicated they will offer no detailed plan for Palestinian self-rule, something that Shamir evidently wants to avoid. Instead, they will stick to proposals for bit-by-bit agenda items. The Palestinians have offered a broad proposal for setting up their own legislature.

The United States is hoping that both sides will eventually put their visions of self-rule on the table so American diplomats can step in and make bridging suggestions.

Despite border violence between Israel and Lebanon, both Lebanon and Syria, which dominates the small Mediterranean state, are attending today’s round. The Israeli-Syrian talks are stagnant. Syria complains that Israel refuses to consider returning any part of the strategic Golan Heights while demanding full peace. Syria is reluctant to commit itself to a peace treaty with Israel unless it gets a commitment in advance that the Golan will once again belong to Damascus.

Lebanon wants Israel to pull out of the far south, where Israel controls a narrow strip of territory, but Israel is reluctant because of Syrian military domination of Lebanon and because Lebanon has been unable to keep anti-Israeli guerrillas from attacking the border region.