WASHINGTON -- Israel rejected Secretary of State James A. Baker III's proposal for a halt to new settlement construction as a condition for obtaining U.S. loan guarantees yesterday, but its ambassador said that talks would continue.
Meanwhile, Sen. Patrick Leahy, a Vermont Democrat who chairs a key foreign appropriations panel, warned both sides that if a deal isn't in sight in 10 to 12 days, he will offer his own compromise.
Emerging from a meeting with Mr. Baker at the State Department, Israeli Ambassador Zalman Shoval said that his country had "made some proposals" but did not say what they were.
"The secretary has discussed with me some of these proposals. There is agreement on some points; there is not agreement on some other points," he said.
"The matter of these guarantees is very, very important to both countries -- obviously more important to Israel, but it is important, I think, to both countries, and therefore we shall all make an effort to find the right solution."
Mr. Shoval said that more meetings would be held after Mr. Baker returns from his trip next week to Russia and other states of the former Soviet Union.
Israel resists any political conditions attached to the loan guarantees. The Bush administration, which has long opposed Israeli settlements in the occupied territories, has proposed a halt in new construction while allowing a fixed number -- below 9,000 -- to be completed.
This is unacceptable to the Israeli government of Prime Minister Yitzhak Shamir.
Israel fears that such a condition would set a precedent for future aid, allowing Arabs to gain concessions from the United States rather than through direct negotiations, and undermining Israeli security policy.
"The Israelis do not want anything that tells them they can't have further settlements. President Bush has said he doesn't want further settlements," Mr. Leahy said in an interview last night.
The senator spoke briefly with Mr. Shoval and then met for an hour and a half with Mr. Baker following the Shoval-Baker meeting.
Mr. Leahy said that "both sides have accepted the inevitability" of conditions he himself laid down: a dollar-for-dollar offset that would penalize any new construction in the settlements, including completion of units already under way.
Other sources said that there may be maneuvering room in his plan to make it acceptable to Israel.
Mr. Leahy said that both Mr. Baker and the Israelis were negotiating in good faith.
But he warned that time is running out to reach an agreement that could be included in a foreign aid bill, which must be completed by the end of March.
If no agreement is "well in sight" in 10-12 days, he said, he will present both sides with a detailed proposal.
This would include both the dollar-for-dollar offset and a formula to conform with U.S. anti-settlement policy, he said.
If either the administration or Israel opposes it, he won't bring the measure forward to his committee, Mr. Leahy said, and "the issue of loan guarantees is dead."