US sends warning to Israel by cutting loan guarantees

In the clearest signal yet of Washington's displeasure with Israel's policies in the West Bank and Gaza, the Bush administration has cut $290m (£170m) from US loan guarantees to the Jewish state, an amount similar to spending on new settlements in the occupied Palestinian territories.

Palestinians have criticised the sum as too small to exert real pressure on the government of Ariel Sharon. Direct US aid to Israel of $3bn a year is not affected. Even so, it is seen as evidence that after several months, the White House is responding to pressure from allies in Europe and the Middle East to "re-engage" in the region.

A senior American official is believed to have met the Israeli Prime Minister in Rome last week to deliver a fresh demand for a halt of settlement activity and construction of the barrier through the West Bank. Mr Sharon said later he was considering "unilateral steps" to advance the peace process.

William Burns, the chief US Middle East envoy, returns to the region tomorrow for the first time since August.

Middle East specialists see a glimmer of opportunity for progress on peace, with the installation of a new Palestinian Prime Minister in Ahmad Qureia, and mounting pressure from within Israel for Mr Sharon to change tack.

Dennis Ross, the US Middle East envoy under presidents George Bush Snr and Bill Clinton, said in yesterday's Washington Post: "There is again an opening to end the past three years of warfare. Both sides want to end the war and create a period of calm."

But familiar obstacles remain, most notably from the US-Israeli point of view, the Palestinian President, Yasser Arafat, with whom neither the Bush administration nor Mr Sharon will deal. Mr Arafat still controls the Palestinian security apparatus, and was powerful enough to force from office Mr Qureia's predecessor, Abu Mazen, formally known as Mahmoud Abbas.

Representatives of Hamas and Islamic Jihad are expected to meet in Cairo next week to agree a ceasefire, the Israeli pre-condition for any progress. But further attacks cannot be ruled out. And even if Mr Qureia can persuade the main militant groups to agree a truce, he will be able to deliver only if he can point to reciprocal steps by the Israelis.

These will have to include not just an end to the present siege of Palestinian territories and the checkpoints that enforce it, but a halt to construction of the border "fence" and a suspension of settlement activities. The Palestinian public, Mr Ross said, must be shown that Mr Qureia and other reformers, can "deliver", by changing Israel's behaviour.

In London last week, President Bush demanded Israeli action in all three areas. Washington is now following up by trimming the loan guarantees.

But it is unclear how much political capital Mr Bush will invest in the Middle East before next year's election. The pro-Israel stance of his administration is popular with the Christian right, a key Republican constituency.

Mr Ross warned: "If the moment of opportunity is lost and Ahmad Qureia fails, there won't be a third Palestinian prime minister who can emerge and create another diplomatic opening any time soon."