THE United States has made its choice, in principle at least. Now Israel will have to do the same.
Secretary of State James Baker III put Israel on notice Friday that it will have to limit or stop construction of Jewish settlements in the occupied West Bank and Gaza Strip if it wants the United States to underwrite a multibillion-dollar loan.
Israel must now decide between two high priorities: The new settlements, needed to anchor what Israelis say is their historic claim to the territories; or up to $10 billion in loan guarantees, needed to absorb hundreds of thousands of immigrants flooding in from the former Soviet Union.
In a meeting here Friday with Israeli Ambassador Zalman Shoval, Mr. Baker made it clear that Israel cannot have both.
As Israel contemplates its dilemma, the US will be contemplating its own: how to link settlements and loan guarantees without jeopardizing the Middle East peace process Baker has worked so hard to create.
If its exact conditions for granting all or part of the guarantees are too lenient, Palestinians might quit the peace talks in protest. If its conditions are too stringent, Israel might bolt. If Baker and President Bush press Israel too hard, analysts add, they could bolster Prime Minister Yitzhak Shamir's appeal as a man willing to stand up to bullying from Washington.
"Bush has to avoid injecting himself into Israeli domestic politics," comments one Middle East expert, referring to the national election campaign now under way in Israel. "If he is too tough he could give Shamir ammunition" in his bid for reelection. Humanitarian purposes cited
Israel says the loan guarantees are for purely humanitarian purposes, to help Jews who risk persecution, or worse, by not emigrating from the former Soviet republics.
Baker says the US wants to help but will do so only if the US has assurances that the money will not be used even indirectly to expand settlements, which he has called the major impediment to ending the Arab-Israeli dispute. Even if Israel provides such assurances, finding support for the full $10 billion will be difficult while anti-foreign aid sentiment runs so high among recession-weary Americans.
Although estimates vary, Israel may have spent up to $1.5 billion last year on Jewish housing and infrastructure in the territories, with major new funding committed for 1992.
Although the money borrowed with the US guarantees - like the $3 billion in annual US foreign aid Israel receives - would not be spent on settlements, it would free other funds to be used for that purpose. Opinion polls indicate that the settlements policy is opposed by a majority of Israelis and American Jews but is supported by Israel's small but politically powerful settler community and right-of-center parties. Appeal to right-wing voters
Most political observers were expecting that, in his campaign for reelection, Mr. Shamir would run as the man who led Israel into the peace process. In what many regard as a risky ploy, he has instead jeopardized both the peace process and the loan guarantee by appealing to right-wing voters.
"No force in the world will stop this construction" of settlements, a defiant Shamir told Jewish settlers last week. His appeal produced cheers in West Bank settlements but anger in the Bush administration.
The $10 billion sought by Israel is part of an estimated $40 billion needed to absorb the new immigrants. The US would not be giving Israel money but simply guaranteeing loans to help it secure better credit terms in commercial markets.
Baker and Mr. Shoval are expected to meet again on the matter after Baker returns from this week's opening ceremonies in Moscow for the third, multilateral phase of the Middle East peace process.