What Israeli officials have feared ever since Secretary of State James Baker III launched his Middle East peace bid has apparently come upon them this week.For the first time, Washington seemed ready to use economic aid to Israel as a weapon, suggesting that if the Jewish state wants the United States to guarantee $10 billion in loans to help absorb immigrants from the Soviet Union, it will have to stop settling Jews in the occupied territories. Officials and politicians here reacted with anger and surprise, rejecting any linkage between the two issues. Yossi Ben Aharon, a top aide to Prime Minister Yitzhak Shamir, called a settlement freeze "an impossible demand." Mr. Baker, speaking to reporters in Damascus where he was wrapping up his latest Middle East shuttle, insisted that "I have not discussed either publicly or privately a settlement freeze in connection with the question of absorption aid for Israel." But senior Israeli officials say Baker made it plain in two days of talks here earlier this week that the US administration would seek to tie the guarantees to a settlement freeze. "Their bottom line was: 'If you want the guarantees ... you will stall all activities in the Golan Heights, Judea, Samaria, and Gaza," said Mr. Shamir's chief of staff, Yossi Ahimeir. "We reject such a condition," he added. "It means handcuffs on Israeli hands on the whole Israeli approach" to the territories. Leaving Israel last Tuesday, a senior US official said Washington did not favor new aid "that does not have any restriction other than the usual boiler plate, which doesn't have any effect on the question of settlements." Previous Israeli assurances that no US aid would be spent in the occupied territories have not prevented an acceleration of the settlement drive. This time, the official said, if Washington guaranteed the loans, it wanted to implement much closer controls over how the money was spent. The problem, however, is that even if the loans were not spent directly in the territories, they would free up other monies to fund the settlements. "There is no end" to this problem of fungibility, as accountants call it, said Mr. Ben Aharon. "It would mean in effect that no money of any sort can be brought into Israel because it might free up money to be used in the territories." "They [the Americans] cannot dictate the use of other Israeli money," said Mr. Ahimeir. Israel's rejection of any linkage between the loan guarantees and the settlements is founded on a fear that if Washington uses its economic clout, this might be the thin end of the wedge. "It means pressure on Israel to give in more and more and more, and who knows where this process will stop?" Ahimeir worried. Hanan Ben Porat, a leader of the National Religious Party, a key partner in Shamir's coalition government, said yesterday that the government should withdraw from the planned peace conference to protest what he called "brutal American pressure."