JERUSALEM — IN the rock face, blasted from an olive-studded hillside below the Jerusalem suburb of Gilo, yawns the mouth of a newly excavated tunnel.
At the end of the 290-yard tunnel is a wide valley, also planted with olive trees. On the opposite slope, earthmovers are digging a second tunnel, to be linked with Gilo by the longest bridge in the Israeli-occupied territories. This ambitious project marks the start of the new road from Jerusalem to Jewish West Bank settlements known as Gush Etzion.
A few miles to the south, Avi Auerbach, a new immigrant from the United States, finds the road works ``reassuring, as long as they continue.'' Dr. Auerbach is just finishing up the new family home he has built in the settlement of Efrat, on a street noisy with construction despite the ``settlement freeze'' declared by Israel in July 1992.
Auerbach is one of 7,000 Jews who have moved into new homes in the occupied territories since Israel signed its framework peace treaty with the Palestinians Sept. 13, according to Shlomo Kattan, mayor of the Alfei Menashe settlement. Whatever the government says publicly, Mr. Kattan boasts, ``they can't stop us'' from continuing to expand Israeli settlements in the West Bank.
Kattan's bravado is not widely shared, even among other leaders of the settlement movement. The drop in demand for homes in the 124 settlements that dot the West Bank is unmistakable.
Of the 7,000 housing units that were under construction when the present government took office, which it undertook to complete, ``over 4,000 are empty, and in the meantime they will stay empty,'' says Ofrah Preuss, adviser to Housing Minister Binyamin Ben-Eliezer.
``People are unsure about the future,'' laments Israel Harel, editor of the settler magazine Nekuda. ``You can buy good bargain homes today, because people don't see a political future'' in the territories.
PUBLIC expenditure on settlements has effectively stopped. When the government took office, it pledged to spend no more money on housing in the occupied territories, and ``the feeling is that the government has kept its word,'' says Amiram Goldblum, who heads a settlement monitoring team for Peace Now. But government policy has not deterred private contractors, or individual settlers, from building homes in existing settlements. Nor has it halted a major road-building spree.
In most of the West Bank, little house building is under way given the unfavorable political climate as Israel negotiates with the Palestine Liberation Organization on details of Palestinian autonomy over the West Bank and Gaza Strip. Government grants to settlers are no longer available, and some private banks are refusing mortgages to potential home buyers in most parts of the occupied territories.
But ``there is a great deal of activity around Jerusalem and along the Green Line'' dividing the West Bank from Israel proper, says a diplomat who follows settler activity. ``You get the feeling that the government is trying to consolidate its position in certain areas'' by closing off Palestinian land, freeing land for private construction, and building roads.
Rapid construction in the area coming to be known as ``Greater Jerusalem,'' and the blurring of the 1967 border through road building, ``maximizes Israel's territorial and political leverage in negotiations on Palestinian self-rule in the occupied territories,'' argues a report on settlement policy to be published soon by the Palestine Human Rights Information Center.
Just as the construction of the new road to Jerusalem encourages Auerbach that the government is not planning to return the Gush Etzion area to Palestinian rule under an eventual peace treaty, other roads in the planning works promise trouble for peace negotiations.
``Roads are where most of the future conflict will be concentrated,'' predicts Dr. Goldblum, especially if the government goes ahead with reported plans to build 460 miles of bypass roads in the West Bank in order to keep Jewish settler traffic safely away from Palestinian towns and villages during the autonomy phase.
Those roads, said to cost $670 million in an estimate by Israeli Television, would constitute a violation of Israel's pledge to halt government investment in the occupied territories when former US President Bush granted $10 billion in loan guarantees 18 months ago.
Under the terms of the loan guarantee agreement, any official Israeli expenditure in the West Bank and Gaza is deducted as a penalty from the sum guaranteed. Washington has already deducted $437 million from the first $2 billion tranche of the loan guarantees, calculating it as Israeli government expenditure in the occupied territories last year.