The United States will deduct 289.5 million dollars this year from loan guarantees currently available to Israel over disagreements over Israeli activity in Palestinian territories, the Israeli Embassy in Washington announced.

The embassy said in a brief statement that the amount was "suggested" by Israel.

"Israel accepts that the United States does not view some of the Israeli activities to date in parts of Judea, Samaria and Gaza as being consistent with US policy," the statement reads.

Israeli Embassy in Washington, DC  [AFP/File]

"Israel understands that the US should not finance directly, or indirectly, activities with which it does not agree."

Israel "therefore suggested that the US deduct the agreed sum of 289.5 million dollars from the 3 billion dollars in loan guarantees currently available."

An Israeli diplomat told AFP the decision was taken Tuesday following a meeting in Washington between US national security adviser Condoleezza Rice, and Dov Weisglass, Israeli Prime Minister Ariel Sharon's chief of staff.

White House national security spokesman Sean McCormack said the United States welcomed what he also characterized as Israel's "suggestion" that the loan guarantees be reduced because of the disagreements.

"This suggestion acknowledges US policy concerns and US law regarding activities in the West Bank and Gaza and is a reflection of close and continuing consultations between our two governments," he told AFP.

During a speech in London last week, US President George W. Bush publicly criticized Sharon's hardline policies in the West Bank and Gaza Strip, after behind the scenes pressure failed to bring results.

Bush said Israel must "freeze settlement construction, dismantle unauthorized outposts, end the daily humiliation of the Palestinian people and not prejudice final negotiations with the placement of walls and fences," in reference to the Israeli separation barrier being built across the West Bank.

In addition to the banking guarantees, Israel in 2003 got one billion dollars from Washington following the war in Iraq, money that came on top of the annual US assistance of almost 3 billion dollars a year, which includes 2.1 billion in military aid.

The 289.5 million dollar figure is the amount Washington has estimated will fund building in the occupied territories -- including building parts of Israel's "security barrier" deep within the West Bank.

For Israel, the structure is a separation barrier designed to prevent infiltrations by Palestinian extremists intent on carrying out terror attacks in Israel.

Palestinians regard the barrier as an attempt to pre-empt the borders of their future state and seize some of their most fertile land.

Chief Palestinian negotiator Saeb Erakat has urged Bush to "force Israel to immediately stop the construction of the apartheid wall."

In October, the United Nations General Assembly overwhelmingly called for a halt to the project.

Israel is obliged to dismantle all outposts under the terms of the US-backed Middle East "roadmap" peace plan which also stipulates a complete freeze on settlement activity.

The continuing settlement activity has prompted accusations from the Palestinians that the Israelis are killing off the "roadmap" and the chances of a two-state solution to the conflict.

Israel can, in theory, still receive up to 3 billion dollars in loan guarantees in 2004, but the government of Ariel Sharon has any for the moment claimed only for 1.6 billion dollar, the State Department said in September.

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