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Urging Israel to ”seize the moment,” Secretary of State James A. Baker III on Monday challenged the Jewish state to compromise and match America`s major Arab allies in a new willingness to pursue peace in the Middle East in the wake of the Persian Gulf war.

Baker also confirmed he will meet Tuesday in Jerusalem with Palestinian leaders from the occupied territories, some of whom are accused by Israel of having ties to the Palestine Liberation Organization and who have told U.S. officials they received ”approval” from the PLO for the meeting.

Launching the most important stop of his postwar peace mission to the region, Baker told Israeli Foreign Minister David Levy that Arab states` ”new thinking” has improved the political climate for diplomacy aimed at a settlement of the Arab-Israeli conflict and the Palestinian question.

Levy said he took heart from Baker`s talks Sunday in Saudi Arabia with the foreign ministers of six Arab gulf states, plus Syria and Egypt. In a potentially historic shift, the Arab nations endorsed the broad outlines of an American peace blueprint for the region, though they differed with the U.S. on how best to proceed.

”What we have heard . . . certainly shows encouraging signs which we did not see until now,” Levy said, adding that the region appeared ”closer (to peace) than we were just yesterday.”

But Baker served notice that the U.S. will ”listen, cajole and plead”

for Israel to launch direct talks with Palestinians and eventually trade land for a peace that would transform the political tinderbox of the Middle East.

The secretary of state also criticized Israeli occupation practices in the West Bank and Gaza Strip, calling on the only democracy in the region to provide democratic rights for the predominantly Arab population in the territories.

”We would like to see freedom of expression, we would like to see democratic principles permitted to flourish,” Baker said when asked about Israeli restrictions on political activity in the territories.

Baker`s appeal for a willingness to compromise set the tone for his first visit to Israel, an occasion awaited with hope yet apprehension by both the government of Prime Minister Yitzhak Shamir and Palestinian leaders in the West Bank and Gaza.

Baker said he was encouraged by his meeting with Levy, but the key part of his two-day stay in Israel comes Tuesday when he is scheduled to meet separately with Shamir and a group of prominent Palestinian activists.

Baker, making his fourth stop on a 10-day trip through the Middle East, the Soviet Union and Turkey, arrived amid a new outbreak of political violence that heightened tensions and prompted him to cancel a walking tour of Jerusalem`s historic Old City.

But he said the shifting alliances in the region after the U.S.-led military victory over Iraq bring new opportunities to break the diplomatic deadlock that has kept Israel under a virtual state of siege for more than four decades.

”I think the time is now for us to try and seize the moment,” Baker said. He said he had witnessed a willingness to consider new approaches.

”I think that whether that ripens and materializes into specific, concrete commitments will depend in large part upon whether there is a similar attitude” on the part of Israel.

Levy said Israel is prepared to try again to implement Shamir`s 1989 peace plan, which calls for elections in the occupied territories for Palestinian representatives who would negotiate with the Jewish state for limited autonomy.

Levy said Israel would hold ”out our hands” to Palestinians, ”offering them freedoms and liberties and the possibility of managing their own affairs” if they renounce violence against the Jewish state.

Baker said the U.S. welcomes some aspects of the Shamir plan but suggested it does not go far enough to provide a lasting settlement of the Palestinian problem.

The peace process foundered last year when the Israeli leader refused to accept Baker`s proposals for implementing the peace plan and selecting the Palestinians who would negotiate with Israel.

This time, Baker warned, both Israelis and Arabs must not lock themselves into positions that could doom any prospect of a settlement.

”I think it`s important to recognize that all parties should avoid retreating into stating final positions as being non-negotiable demands,”

Baker said. ”. . . We will not make progress if one side or the other says,

`We will not move until the other side moves.` ”

Reassuring Israelis that the U.S. remains firmly committed to the security of the Jewish state, Baker said the credibility of Washington`s security guarantees was enhanced greatly both in the Arab world and in Israel by the triumphant American-led military effort against Iraq in the gulf.

Among the Palestinians scheduled to meet with Baker is Faisal Husseini, a leading nationalist in East Jerusalem who frequently has been detained or placed under house arrest since the Palestinian intifada, or uprising, against Israeli occupation began 40 months ago.

Baker and his top aides insisted the meeting would not constitute a resumption of the U.S. dialogue with the PLO that was broken off last summer after the organization refused to renounce a faction that carried out a failed terrorist commando raid against Israel.

Lambasting the PLO for siding with Saddam Hussein in the gulf war, Baker declared the U.S. dialogue with the group ”terminated” but later told reporters he meant to say ”suspended.”

The eight Arab foreign ministers who met with Baker in Riyadh on Sunday expressed disillusionment with PLO Chairman Yasser Arafat and are not prepared to let him back into the diplomatic game, a senior U.S. official said.

”There wasn`t one who said he was willing to sit down with Arafat,” the official said.

Flying to Israel from talks in Cairo with Egyptian President Hosni Mubarak, Baker traveled by motorcade to Yad Vashem, Israel`s Holocaust museum, where he toured the grim exhibits of Nazi Germany`s systematic mass murder of Jews and laid a wreath in its Hall of Remembrance.

His visit to Israel unleashed a flurry of violence that underscored the intractability of the Israeli-Palestinian conflict.

One day after a 26-year-old Palestinian man stabbed to death four Israeli women in Jerusalem and said his attack was a ”message for Baker,” Israeli troops shot and killed six Palestinian guerrillas who had infiltrated across the border from Jordan. Gen. Yitzhak Mordechai, head of the central command, said the guerrillas carried automatic rifles and hand grenades and had

”enough weapons to perpetrate many killings.” He said the attack appeared timed to coincide with Baker`s arrival.

In the Gaza Strip, three Israeli soldiers were reported killed and a fourth injured Monday night by a vehicle driven by a Palestinian. Officials were investigating whether it was a deliberate act.

On the West Bank, a 21-year-old Palestinian woman stabbed a Jewish settler outside the police station in the Arab city of Ramallah. The woman was shot by Israeli authorities. Both the woman and the settler were reported in fair condition in local hospitals.

Thousands of troops and police were deployed throughout Jerusalem on Monday to provide security for Baker`s visit and to prevent anti-Arab violence at the funerals of the four women, one of them a Soviet Jewish immigrant who had arrived in the country only two months ago.