Relations between the two halves of the Israeli government are deteriorating rapidly as prospects for convening a Middle East peace conference show some evidence of improving. As Foreign Minister Shimon Peres intensifies his campaign for an international conference, Prime Minister Yitzhak Shamir is fighting harder to prevent it. At the heart of their dispute is the status of the Israeli-occupied West Bank and Gaza Strip, the one issue over which Mr. Peres's centrist Labor Party and Mr. Shamir's nationalistic Likud bloc differ dramatically. And chances of a crisis that will lead to early elections in Israel are increasing, political analysts here say.
Peres's aides point to several developments improving the chances for a peace conference: the Soviet Union's persistent, public promotion of an international conference; assurances passed on by Washington that Jordan's King Hussein is committed to holding a conference this year; US Secretary of State George Shultz's greater willingness to explore the notion; and the growing isolation of the Palestine Liberation Organization from key Arab states.
What is emboldening Peres, and even bringing Labor hawk, Defense Minister Yitzhak Rabin to support a conference that he has criticized in the past, is their growing conviction that King Hussein is willing to come to talks without the PLO, Foreign Ministry sources said.
The King was given a push in that direction, Peres aides insist, by Egypt's announcement Monday that it was closing the PLO's Cairo offices because the group had criticized Egypt's peace treaty with Israel, at the recent Palestine National Council in Algiers. Peres's advisers now believe that Hussein, with Egypt's backing, would be willing to come to the table with non-PLO Palestinians from the West Bank and Gaza.
These developments are convincing enough to have put the Likud on the warpath. This week Shamir is in Paris, telling Prime Minister Jacques Chirac that the Likud half of Israel's government opposes a conference. Last week, Shamir sent Likud envoy Moshe Arens to Washington in an unsuccessful bid to dissuade the Reagan administration from supporting Peres's efforts. Shamir's office confirmed Tuesday that President Reagan had sent a cable asking him not to miss ``this historic opportunity'' to pursue peace talks.
The controversy is being fueled here by rumors - carefully leaked by Peres aides - that Hussein and Peres agreed on the format and scope of such a conference at a secret meeting two weeks ago. Peres denied the meeting took place. But he said he soon will present concrete proposals to the Israeli Cabinet on convening a conference. Peres says the talks would serve as the prelude to direct Israeli-Jordanian talks on the future of the West Bank and Gaza Strip.
The Likud opposes, on ideological and security grounds, relinquishing any territory Israel now occupies. Peres has told US diplomats that he would prefer to go to a conference with Israel's coalition government intact, but that if he must choose between peace talks and the government, he will choose talks.
There is risk involved in bringing down the government over the issue of making peace with Jordan, Labor Party analysts concede. Public opinion polls show that Israelis are about evenly divided on whether they would be willing to trade some of the West Bank in return for peace. The Labor Party has long tried to remain ambiguous on its willingness to trade land for peace. Recently, Peres and other Labor Party leaders have been taking bolder public positions.
Last week, Defense Minister Rabin created a storm of controversy when he said that he did not view two Likud-approved West Bank Jewish settlements as strategically important to Israel. His comments were interpreted by rightist parties as a signal to Hussein that Israel is willing to make major concessions in talks.
But many pieces remain to be pulled into place before a peace conference can get underway, analysts here caution.
Hebrew University professor Matti Steinberg, an expert on the PLO, contends that Egypt's President Hosni Mubarak does not intend his break with the PLO to give carte blanche to Jordan to proceed to peace talks without the PLO. ``Mubarak is very angry,'' Dr. Steinberg says. ``But he knows very well that the Palestinians in the territory and in the diaspora support Yasser Arafat. I don't think he's ready to circumvent the PLO.''
After the Algiers conference, Steinberg says, the PLO is more dependent on the Soviet Union. While the PLO is now united, he adds, it is isolated both from the two most important moderate Arab states - Jordan and Egypt - and from the most important hard-line state, Syria.
``But Arafat still has the support of the Palestinians and the unity of the factions,'' he says. Arafat now is maneuvering frantically with the aid of the Soviets to reconcile with Syrian President Hafez Assad. Should a reconciliation take place, Steinberg says, it could well end all prospects of convening a conference.
The Soviet Union supports the Syrian and PLO view that an international conference should give the power to break deadlocks betwen negotiating powers to the plenum, composed of the five permanent members of the UN Security Council plus all parties to the conflict. Israel and the US reject such a setup.
``The important thing to watch now is what the Soviets and the Syrians decide to do,'' Steinberg says. ``The Soviets now have the power to veto any sort of conference they don't like, because the Soviets now hold the PLO card.''