HUNT FOR A MOLE

(2 of 2)

But even the hint of another Israeli-spy scandal touches raw nerves in the U.S. and abroad. Jewish organizations accused the Pentagon of anti-Semitism last year after they learned that the Defense Investigative Service had sent a memo to military contractors warning that the Israeli government might might try to recruit Jewish Americans as spies. The Pentagon quickly disavowed the memo. "Somebody is trying to destroy or hurt U.S.-Israeli relations," Anti-Defamation League director Abraham Foxman said of the Mega report.

Indeed, the leak came at a tindery time for U.S. diplomacy in the Middle East. The Clinton Administration has had testy relations with Netanyahu, whom Washington blames for the gridlock in the Palestinian talks. Israeli officials complained that if their embassy phone calls were tapped, Washington also is guilty of spying.

Meanwhile, allegations of a secret conduit to Israel will only feed a growing Palestinian disenchantment that the U.S. is no longer an honest broker in the negotiations. In exclusive interviews with Time this week, senior Arafat aides called on the White House to dump U.S. envoy Dennis Ross for siding too much with Israel. "Palestinian officials...don't trust him," says Arafat spokesman Marwan Kanafani. The Administration is sticking with Ross, who was in the Middle East last week trying to restart the talks. But those negotiations could become even more difficult the more friends learn about their spying on each other.

--With reporting by Scott MacLeod/Jerusalem and Elaine Shannon/Washington