Baker Steps Up Pressure on Israel : Diplomacy: The secretary warns that settlement activity in West Bank and Gaza must end if U.S. funds are to be used to house Soviet emigres.

WASHINGTON —  Secretary of State James A. Baker III, increasing U.S. pressure on Israel in advance of a key debate on the Middle East peace process, said Thursday that the Jerusalem government must end all settlement activity in the West Bank and Gaza Strip if it hopes to obtain U.S. funds to house an expected flood of Jewish immigrants from the Soviet Union.

By linking Israel’s request for $400 million in housing guarantees with Washington’s longstanding criticism of settlements in the occupied territories, Baker turned up the heat on Prime Minister Yitzhak Shamir as he prepares for a meeting of his government’s top leadership to consider what may be the final American attempt to start a dialogue between Israel and its Arab adversaries.

A government spokesman in Jerusalem said Shamir plans to convene a meeting of the “Forum of Four”--the key policy-makers in Israel’s coalition government--no later than Sunday to decide if they will accept Baker’s latest proposal. Besides the prime minister, the group consists of Foreign Minister Moshe Arens, Defense Minister Yitzhak Rabin and Finance Minister Shimon Peres.

Baker outlined the process, which would begin with a meeting of the foreign ministers of Israel, Egypt and the United States, to Arens when the foreign minister visited Washington last week. He reportedly told Arens bluntly that unless Israel responds to Arab compromises with concessions of its own, Washington may end its Middle East mediation, at least for now.

Appearing before a House Appropriations subcommittee Thursday, Baker emphasized that the next step is up to Israel.

“We’re coming very close to the time when we will know one way or the other whether we’re going to have a chance of succeeding or not,” Baker said. “We’ve really done pretty much all we can do, we think, from our end, and we are awaiting a response from the Israeli government.”

At the same time, Baker outlined a tough, new attitude toward U.S. foreign aid to Israel, in effect reminding Shamir that his economy depends on American support.

Asked for the Administration’s position on legislation, introduced in the Senate, to provide $400 million for housing Soviet Jews in Israel, Baker said it probably could support the bill “if the government of Israel could . . . provide some assurance that it would not be engaging in any new or additional settlement activities” in the West Bank and Gaza Strip.

He said it would not be enough for Israel to promise not to spend any of the U.S. money in the occupied territories because that would permit the Shamir regime to use the American funds to free up money from other sources for use in the West Bank and Gaza.

Israeli officials have said repeatedly that they will never agree to stop building or expanding Jewish settlements in the occupied territories.

For years, the U.S. government has described Jewish settlements in the occupied territories as “an obstacle to peace.” But no previous Administration has suggested using foreign aid as a lever to force Israel to stop the settlement.

Baker’s comments Thursday were limited to the $400-million housing program. But they seemed to put Israel on notice that similar conditions might be attached later to other economic and military aid, currently running at about $3 billion a year. Israel receives about 20% of the entire U.S. foreign aid budget, by far the largest amount of any country.

Baker also said the Administration would consider an across-the-board cut in aid to all countries currently receiving it to provide funds to aid Nicaragua, Panama and the formerly Communist nations of Eastern Europe.

The meeting of the Israeli government’s big four politicians comes in the midst of bitter infighting which had put tremendous pressure on Shamir even before the U.S. government weighed in.

The U.S. peace plan calls for a meeting in Washington of Baker, Arens and Egyptian Foreign Minister Esmat Abdel Meguid. Egypt, the only Arab nation that maintains diplomatic relations with Israel, is acting as a surrogate for the Palestine Liberation Organization because Israel refuses to deal directly with the PLO.

The foreign ministers would select Palestinian representatives to negotiate with Israel over the rules governing elections in the West Bank and Gaza Strip. The elections would then pick a Palestinian delegation to negotiate with Israel over the future of the occupied territories. Although the foreign ministers meeting would not assure success, it is a vital first step without which the process could not move.

The three-nation get-together has been pending since early December. Acceptance by Israel has stalled over the thorny issue of which Palestinians will be selected and who will pick them.

Shamir’s agreement is pivotal. Rabin and Peres, ministers from the center-left Labor Party, have indicated a willingness to go ahead. Arens, from Shamir’s Likud Party, will follow the prime minister’s lead, sources in the Foreign Ministry say.

“Any decision will be dramatic,” said government spokesman Yossi Olmert. “Shamir is under great pressure.”

In the talks with Arens last week, Baker spelled out hair-splitting ground rules for picking the Palestinian peace panel: names would be selected without overt reference to categories such as where the Palestinians live. This compromise is supposed to avoid controversial questions about participation of Arab residents of Jerusalem or Palestinians-in-exile.

On Thursday, Shamir said he expects a decision to be made in “days or weeks.”

If a decision comes out of the Forum of Four meeting, the issue will then move to the full Cabinet and culminate a laborious process of seeking common ground for peace talks.

Shamir proposed the West Bank and Gaza elections last May. Although his plan was designed to sidestep the PLO, both the United States and Egypt believe that the organization would have to give at least tacit approval before any meaningful election could be held.

Shamir opposes participation by overt PLO members, Arab residents of Jerusalem and Palestinian living outside the West Bank and Gaza. According to Likud officials, the prime minister believes that a role for Arab Jerusalemites would throw into question Israel’s control over its own capital, while a role for outsiders might open the way for Palestinian refugees to return to the territories.

“It’s clear that whoever lives in East Jerusalem will not be able to participate in these negotiations,” Shamir said Thursday in an interview with the Associated Press.

In the interview, he also expressed anger at suggestions, apparently from U.S. officials, that Israel should not settle Soviet immigrants in the predominantly Arab sector of Jerusalem.

“We are very upset by some statements about the immigration of Soviet Jewish people saying that they not be permitted to live in East Jerusalem,” he said.

In the meantime, there is nagging doubt that the government can hold together no matter what decision is reached.

Likud is in shreds. Ariel Sharon, Likud’s hawkish former trade and industry minister, resigned from the Cabinet to take up the fight against talks. Yitzhak Modai, the economics minister, is threatening to leave the party and take along followers of his own.

Likud doubters contend that by embarking on negotiations, Israel will be drawn willy-nilly into talks with the PLO that will lead to the creation of an independent Palestinian state in the West Bank and Gaza.

Shamir has had harsh words for dissenting party members. “There are Likud (Parliament) members attacking me, interrogating me and spreading crude lies as if I had already agreed to the Baker proposals,” he told a meeting of Likud Cabinet ministers Wednesday.

The embattled prime minister is scheduled to meet with Likud ministers Saturday.

The Labor Party, meanwhile, has threatened to quit the coalition if no progress is made. Labor set a deadline of next Wednesday for accepting Baker’s invitation, although party officials now say the timing is flexible.

Kempster reported from Washington and Williams from Jerusalem.