CAIRO, Egypt -- Israel and the United States failed to reach a compromise yesterday on the explosive loan guarantee issue, and within hours after their talks the Bush administration signaled it would refuse to provide the requested help unless Israel agreed to a freeze on future settlements in the occupied territories.
Failing such a promise, a senior U.S. official said that Secretary of State James A. Baker III would recommend that President Bush take the fight directly to the American people with a nationwide campaign, including a possible Oval Office televised address, "If that is what it takes, because it is their tax dollars that would be supporting settlement activity, which we used to characterize as illegal and which we now moderately characterize as an obstacle to peace."
If the Bush administration sticks to its position, it would mark the first time that any U.S. government has attempted to use its economic leverage over Israel to get it to halt the building of settlements in the occupied territories.
The U.S. position was discussed aboard Mr. Baker's airplane as he was flying to Cairo after his second day of meetings in Jerusalem with Prime Minister Yitzhak Shamir.
In an unusually blunt briefing, reporters were told explicitly for the first time what has been implicit in the administration's position all along: that it will not give the Israelis the $10 billion, five-year loan guarantee for housing for Soviet immigrants without an Israeli agreement to halt future settlements in the occupied West Bank, Golan Heights and Gaza Strip.
Successive U.S. administrations have opposed settlement building since Israel, in the aftermath of the June 1967 war, took control of the territories. But none has ever gone as far as to explicitly tie economic assistance to a formal freeze.
Israel has made it clear that it needs the loans to build housing and roads in coming years to care for the huge influx of Soviet Jews, 300,000 of whom have entered in the last few years, with a million more expected in coming years.
Technically, no U.S. aid to Israel can be used in the occupied lands, but the Israelis have been accused of using the U.S. aid to free up other money for the occupied lands, and then asserting that U.S. money was being spent in Israel proper.
The Bush administration has concluded, reporters were told, that the only way to make sure that no U.S. money ends up building new Jewish settlements is by going for a total freeze on settlements.
That move is bound to generate an explosive debate in the United States between the administration and Israel's congressional backers, which, reporters were explicitly told, is precisely why the Bush administration wants to delay the Israeli loan requests for four months, until after the start of a proposed peace conference in October.
Since either Israel will be upset or the Arabs will be upset with the outcome of the coming debate, the administration wants it to take place after the Arabs and Israelis have been enticed to the peace conference, when they will have much more to lose if they walk out or scuttle it.
The United States has taken the position that the Fourth Geneva Convention signed at the end of World War II bars an occupying power from settling the land with its citizens. On that basis, the United States has regarded the Israeli settlements as illegal.
Reporters were told that if the United States gave the loan guarantees to Israel now, unlinked to a halt in settlements, Mr. Baker was confident that the Arabs would not show up. Paradoxically, no Arab government has stated that in public.