Several prominent members of Israeli Prime Minister Benjamin Netanyahu's team Sunday seized on a comment made by U.S. Middle East envoy George Mitchell last week, perceiving it as a direct threat.
In an interview with Charlie Rose, Mitchell briefly outlined the tools the administration has at its disposal to pressure the Israeli government in peace talks with the Palestinians, saying, "Under American law, the United States can withhold support on loan guarantees to Israel." Mitchell also said he preferred dialogue to sanctions.
Israeli Finance Minister Yuval Steinitz said Mitchell's suggestion contradicted an agreement the two countries made just months ago.
"We are doing just fine. But several months ago, we agreed with the American Treasury on new guarantees for 2010 and 2011, and there were no conditions," said .
Education minister Gideon Saar also criticized the comments at Sunday's Cabinet meeting. "The American administration knows that those who are holding up the negotiations are the Palestinians. Israel has made many concessions while the Palestinians didn't do a thing."
The State Department was quick to try to defuse the row. "It's one thing to say that's a tool in the toolbox, and another to say it's one we are getting ready to use. We are not," State Department spokesman Philip Crowley told the Times of London
After months of wrangling, Netanyahu announced a 10-month moratorium that excluded 3,500 buildings already under construction in the West Bank and did not affect construction in Jerusalem.
The Palestinians are still holding out for a comprehensive settlement freeze.
In recent years, the United States has provided Israel with up to $9 billion of annual loan guarantees. The deal provides Israel with competitive interest rates and guarantees U.S. payment should it default on the loan.
U.S. law however allows a reduction in the loan amount equivalent to the sum Israel spends building in the occupied territories. The threat to withhold loan guarantees has been made twice before.
In 2003, President Bush, normally a staunch ally of Israel, waved the stick in response to Israel's construction of its controversial security barrier on Palestinian territory.
In 1991, his father's administration threatened then Prime Minister Yitzhak Shamir over settlement building and forced him to attend the Madrid Peace Conference.
Mitchell's is expected to soon make his first visit to the region in several months. His reception in Israel may be frosty.