All Eyes Are Focused on Israel to Untangle the Hostage Snare : Diplomacy: Who will make the first move? To get its missing servicemen, Israel will try just about anything--even cutting a deal.

TEL AVIV —  The Israeli government and the Shiite fundamentalists in Lebanon are waging a war of attrition to force the other to make the first concession in the prolonged hostage crisis. As Abbas Moussawi, a leader of Hezbollah (Party of God), the umbrella organization for the various Lebanese factions that hold 10 Western hostages, insisted last week, “If the West wants to see the remaining people free, it’s now Israel’s turn to react.”

Moussawi expressed his hope that the Bush Administration would follow British Prime Minister John Major’s lead, and pressure Israel to release “Arab” prisoners. But in the letter to the U.N. secretary general after the release of two hostages, Hezbollah neither defines its general demand nor names the “Arab” prisoners.

Israeli officials assume the pro-Iranian Hezbollah wants to obtain freedom for all 400 Shiite Muslims captured last year by Israeli troops and their Christian allies in southern Lebanon. These prisoners are accused by Israel of “being members of Hezbollah and involved in terrorist acts.”

When Hezbollah finally clarifies its conditions for a future deal, Israeli officials expect the return of Sheik Abdel Karim Obeid to top the list. Almost two years ago, Israeli commandos abducted Obeid, a religious Shiite leader who coordinated terrorist guerrilla attacks. In addition, Israeli officials fear such a list will include Sheik Ahmed Yassin, founder of a Palestinian fundamentalist organization, and some of his followers, now serving life sentences for murderous activities against Israelis.

However, the Israeli Cabinet adopted a secret resolution that no prisoner would be released unless Hezbollah provided solid information about seven Israeli servicemen captured in Lebanon. “When we send our sons to the army,” explained Amos Yaron, a retired Israeli general once involved in the search for the missing, “we have a sacred obligation to them and their families to do our utmost to secure their release in case they are captured. Should they fall in battle it is our duty to return their bodies.” This principle, rooted in Jewish tradition, has been a pillar of Israel’s security ethos.

Following new instructions from Iran, Moussawi recently hinted that at least two Israelis might be freed. Last Tuesday, in Damascus, Ahmed Jibril, leader of a Palestinian terrorist group based in Syria, claimed three Israelis are still alive and held by Hezbollah, three were confirmed dead and another was unaccounted for, but presumed dead. In response, Dani Nave, special adviser to Israel’s defense minister, said, “We would treat all public statements as rumors and intentional disinformation, as long as concrete evidence is not provided.”

For years, Israel spared no effort to obtain information about the fate of its soldiers. The Cabinet asked Israeli military and intelligence experts to explore military options. In 1985, Col. Oliver L. North, a coordinator of the illegal U.S. arms sales to Iran, and Amiram Nir, his Israeli counterpart, planned a joint commando unit that would rescue the Western and Israeli prisoners. Yaacov Nimrodi, an Israeli arms dealer, revealed last week that Terry Waite, the Anglican emissary to the kidnapers, agreed to allow the CIA to install a tiny transmitter in his rectum to obtain information for the planning of a rescue operation. But, while negotiating with Hezbollah in Beirut, Waite was also taken hostage.

Exploring their options, Israeli, U.S., European, Soviet and Lebanese lawyers, intelligence officers, diplomats, arms dealers and other intermediaries met secretly in European and Middle Eastern capitals. They all assumed Syria and Iran must be approached, because both are notorious supporters of terrorism. But Damascus and Tehran denied any knowledge and refused to cooperate. Lebanese sources even claimed that two secret meetings between Israeli intelligence officers and Hezbollah officials were held in Paris and Geneva last January. But all in vain.

Now, with the U.S. victory in the Gulf War and the Soviet Union’s collapse as a superpower, Iranian and Syrian leaders must deal with a new geopolitical reality. They are vying to be a part of George Bush’s new world order. President Hafez Assad of Syria agreed to participate alongside Israel in the international conference for peace in the Middle East; his Iranian counterpart, Hashemi Rafsanjani, expressed his desire to improve relations with the West. For the first time, Syria and Iran are quietly applying strong pressure on their Shiite and Palestinian clients, forcing them to change policy.

After years of refusal, Hezbollah has agreed to international brokerage and authorized U.N. Secretary General Javier Perez de Cuellar to start negotiations. Perez de Cuellar has far to go, but after meetings last week in Geneva with Israeli and Iranian negotiators he expressed “cautious optimism.” His immediate task is to devise a formula to satisfy both Israeli and Shiite interests. Israeli Defense Minister Moshe Arens said if “satisfactory information about our POWs and MIAs is obtained and the visits by officials of Red Cross International are arranged, Israel will contribute its share to the deal.” Israel, according to well-informed sources, would reciprocate by releasing dozens of Shiites in a goodwill gesture.

However, even if the deal reaches such an advanced stage that all Lebanese Shiites held by Israel are released, it will still not meet Hezbollah and Iranian conditions. They want to include Palestinians from the occupied West Bank and Gaza Strip. Israel rejects this. Officially, Jerusalem has always maintained, “Terrorism should not be rewarded.”

The government ran into trouble when it ignored this. In April, 1985, the Israeli Cabinet burnt its fingers when it freed 1,150 Palestinian terrorists in exchange for three Israeli soldiers held by the pro-Syrian terrorist group headed by Ahmed Jibril. The unprecedented deal was highly criticized by the Israeli public. Judging from this traumatic experience, Israeli leaders fear to be again involved in a similar extended swap.

Yet, Israeli and U.S. experts believe the Shamir government will eventually agree to almost any deal because of the international demand to see the hostage crisis through. In addition, pressure is building domestically from the families of the seven missing men.

But a comprehensive agreement will have to include settlement of old financial problems between Israel and Iran and the restoration of political and economic relations between Iran and the West.

Washington and London do not want to be dragged into any “hostages-for-money,” deal that might look too much like the Iran-Contra abortive “hostages-for-arms” trade. Therefore, they refuse to renew economic relations with Tehran, or unfreeze Iranian assets worth billions of dollars, too close to the release of the hostages.

Returning from the talks in Geneva, Israeli negotiators estimated that talks would be “tough and (would) last weeks rather than days.” But despite the difficulties, most parties in the delicate negotiations believe the knot will be disentangled soon. If goodwill gestures are indeed obtained, it will mark the final countdown for one of the most logistically difficult and politically sensitive deals of the decade.