The Bush administrationsaid today it planned to withhold some funds from Israelbecause of its settlement activities in Palestinian areas.
The deductions would come from a $9 billion package of US loan guarantees to help Israel weather a deep recession and fiscal crisis.
But administration officials said they have yet to decidewhether to penalize Israel for building a fence through theWest Bank. Congressional aides doubted the White House wouldcarry out that threat.
Under legislation authorizing the loan guarantees, theUnited States would deduct from the face value of the loanguarantees an amount equal to any Israeli spending onsettlement activities in Palestinian areas.
An administration official said those deductions wereconsistent with past US policies. He did not specify anamount that would be deducted or when it would take place.
"We can't preclude any deductions (for fence construction).That is still a matter for discussion," the official added.
President George W. Bush has called the fence "a problem"because it makes it hard to develop a contiguous Palestinianstate.
Israel and its allies in Congress argue that expenditureson the security fence should not be deducted from the loanguarantees.
Israel wants the barrier - in sections a concrete wall andin others metal fencing -- to keep out Palestinian suicidebombers. Palestinians describe it as a new "Berlin Wall" thatgrabs territory they want to be part of an independent state inthe West Bank and Gaza Strip.
Israel and its allies in Congress argue that expenditureson the security fence should not be deducted from the loanguarantees.
Bush today designed Secretary of State Colin Powell tooversee the loan program.