Bush threatens to withhold loans if Israel continues security wall

The Bush administration is threatening to withhold billions of dollars in loan guarantees from Israel if the government of Ariel Sharon continues to build its "security fence" in the West Bank.

Up to $9bn (£5.6bn) could be withheld from loan guarantees intended for housing and commercial projects. The funds were approved earlier this year by Congress but are awaiting presidential approval.

In what would be the first open confrontation between the US administrationand Mr Sharon, the National Security Adviser, Condoleezza Rice, is poised to tell Israel that the money will be suspended.

Michael Anton, spokesman for the National Security Council, said: "We've made clear to the Israelis in public and private settings that the fence is a concern. And we've had many conversations [even at] the highest levels about the fence."

The US has apparently come to the decision after lobbying from Palestinian leaders, who say that the wall has cut off Palestinian families from their schools, homes, farms and workplaces. The Palestinian leadership has also argued that the wall is intended to establish a de facto border for Israel in the West Bank.

The issue of the wall was raised when George Bush and Mr Sharon held talks recently in Washington. Aides worked hard to promote the talks as friendly and constructive and Mr Sharon reportedly agreed to look at ways of making the barrier less of a difficulty for the Palestinians.

After talks between Mr Bush and the Palestinian Prime Minister, Abu Mazen, at the White House last month, Mr Bush publicly admitted his opposition to the wall. "I think the wall is a problem, and I have discussed this with Sharon," he said. "It is very difficult to develop confidence between the Palestinians and the Israelis ... with a wall snaking through the West Bank."

It appears Washington is now backing up those words with at least the threat of action. The loan guarantees approved by Congress come with an attached clause that says the money cannot be used to help develop settlements in the West Bank or Gaza Strip. It specifies that if Israel spends any money on such settlements, that amount will be withdrawn from the funding. One American official told The New York Times that the administration had now decided that the loans must not be used to pay for any part of the wall or else to free up other Israeli funds to pay for it. "The feeling is that we need to do something about the fence," the official said.

The last time any such loan was withheld was during the presidency of President Bush's father at a time when relations between the US and Israel were felt to have reached a record low.

In Jerusalem, Moshe Arad, who was Israeli ambassador to the US during the first Bush administration, contended that President Bush would only repeat his father's action if the Palestinians showed they were serious about dismantling the terrorist infrastructure. Then the US would demand a quid pro quo from Israel. Mr Arad predicted that by November, when the election campaign season opens, White House policy would be driven by domestic political considerations. "It will not go well with Congress if Bush follows his father's precedent," Mr Arad said. "And it will not go well with Jewish Republican supporters."

While the Bush administration has gone out of its way to have good relations with Israel it has persistently criticised the building of the wall, saying it threatens the peace road-map sponsored by the US.