Bush Rejects Israeli Loan Compromise : Foreign aid: He stands fast, refuses to provide guarantees without a ban on new settlements in the occupied territories.

President Bush rejected a proposed compromise on loan guarantees for Israel on Tuesday because it did not include a requirement that Israel halt all settlement activity in the disputed West Bank and Gaza Strip.

The move appears to doom Jerusalem’s chances of obtaining the $10 billion in loan guarantees that it needs to provide houses and jobs for Jewish immigrants from the former Soviet Union.

“We haven’t got an agreement,” Sen. Patrick J. Leahy (D-Vt.) told reporters after discussing the proposed loan guarantees with Bush at the White House. “We seem to be talking past each other, and I’m very, very discouraged.”

Leahy, chairman of the Senate Appropriations subcommittee on foreign aid, and Sen. Bob Kasten of Wisconsin, the panel’s ranking Republican, had tried to bridge the gap between the Administration and the Israeli government on the emotional issue of Jewish settlements in territories seized by Israel during the 1967 Middle East War.

Although the President insisted that the issue is not dead, it is difficult to see what the next step could be.

Israeli Prime Minister Yitzhak Shamir has flatly refused to curtail settlement construction by his government, and Bush refuses to consider a loan package that does not require halting work on those settlements.

“We have a longstanding policy that feels that settlements are counterproductive to peace,” Bush said just before his meeting with Leahy and Kasten. “This is not a new policy. This is a longstanding policy, and I am determined to see that that policy not be altered.”

Talking to reporters during a St. Patrick’s Day ceremony in the White House Rose Garden, Bush said he supports the objective of helping Israel to resettle the influx of immigrants but is unwilling to endorse the loan guarantees without a promise that the money would not be used, even indirectly, to finance settlement construction. “We want to help in a humanitarian way,” he said. “But we simply are not going to shift and change the foreign policy of this country. We’re being consistent.”

Leahy said that without agreement on the Israeli loan guarantee, it is unlikely that Congress will pass a foreign aid bill this year, choosing instead to approve a “continuing resolution” that will continue existing programs but make no significant changes. That would extend Israel’s regular $5-billion foreign aid allocation but would block new programs, including Bush’s plan to aid Russia and the other republics of the former Soviet Union.

“I think the parties are far apart,” Leahy said. “The foreign aid bill could well go down the tubes wrapped around this.”

Although Washington and Jerusalem have always disagreed about settlements, the dispute has seldom been as vitriolic as it is now. Combined with a new controversy over U.S. intelligence reports indicating that Israel has sold U.S.-supplied weapons technology, the loan guarantee issue has soured the entire U.S.-Israel relationship.

On Capitol Hill, supporters of Israel berated Administration officials for linking housing for Soviet Jews with West Bank and Gaza settlements.

“At the highest level of this government there’s an effort to undermine the relationship between the United States and Israel and undermine public confidence in that relationship,” said California Rep. Mel Levine (D-Santa Monica). “It’s a tragedy, and it shouldn’t be occurring.”

Meanwhile in Jerusalem, Israel took the offensive in the dispute with the United States over arms sales, accusing Washington of raising a ruckus to divert attention from pending American weapons sales to Saudi Arabia.

With the criticism, Israel refined its conspiratorial view of recent news reports in the United States charging Israel with funneling American-supplied technology to other countries, notably China and South Africa.

“All I know is that there is plenty of discussion about things that are not happening and no discussion of what is happening,” government spokesman Yossi Olmert said. He argued that a general buildup of arms in the Middle East is “not getting enough attention” because of the flap over Israeli sales.

At the heart of Israeli concern is a $5-billion sale of advanced F-15E and F-15H jets to Saudi Arabia. The F-15E ground attack jets include sophisticated navigation and targeting systems that make it possible for the aircraft to fly low and deliver bombs with pinpoint accuracy.

Assistant Secretary of State Edward P. Djerejian, the Administration’s top Middle East specialist, told a House subcommittee that Saudi Arabia’s request for F-15s is being considered but that no specific request has yet been sent to Congress.

“If we decide to proceed, you can be sure that the Administration will consult fully with Congress well in advance of submitting a notification,” Djerejian said.

At the same time, however, Djerejian defended the sale: “The Saudis and the Gulf states occupy some of the world’s most prized real estate. It’s a very dangerous neighborhood. . . . Iraq retains a military capability which could pose a threat to its neighbors.”

Kempster reported from Washington and Williams from Jerusalem. Times staff writers James Gerstenzang and Art Pine also contributed to this report.