ARABS CAUTION ISRAEL : SHIFT IN PEACE TALKS MAY CARRY BIG PRICE.

Byline: G.G. LaBELLE Associated Press 

Arab leaders said Sunday that Israel risks setting back the peace process and its budding economic ties with the Arab world if it changes the ground rules for negotiations.

The leaders of 21 Arab nations wound up their two-day summit by issuing a statement saying they would reconsider their relations with Israel if Israel rejects the land-for-peace formula accepted by both sides five years ago as the basis for a settlement.

``Any deviation by Israel on implementing its obligations and agreements will create a response,'' said Egyptian Foreign Minister Amr Moussa, the summit spokesman.

``This would lead us to a setback in the peace process and, naturally, the Arab world will reconsider all the steps they have already taken.''

The statement did not specify what actions the Arabs might take, and Moussa refused to elaborate.

But the most punishing strategy - something discussed at length in closed sessions of the summit - would be to cut off emerging economic ties between Israel and the Arab world.

Sources said Syria and other hard-line states wanted the conference statement to demand an end to all economic ties between Israel and the Arab world if Israel backs away from the land-for-peace framework.

But Jordan, which has made peace with Israel, and other countries that have opened trade links with Israel opposed any such moves. Countries like Tunisia, Morocco, Qatar and Oman may be unwilling to forgo potentially profitable deals.

There are no reliable estimates on Arab-Israeli trade.

The statement was stronger than expected and attempted to put the onus on Israel to live up to its pledges.

If Israel's government withdraws from past agreements or delays implementing them, the statement said, ``it will lead to a setback in the process with all the dangers that carries in taking the region back to the whirlpool of tension.''

Israel's new prime minister, Benjamin Netanyahu, reacted with indignation. He said the statement included ``preconditions that hinder security (and) are incompatible with peace negotiations.''

Netanyahu said the peace process ``cannot be made hostage to other prior conditions'' - a reference to the Arab demands that his government agree to trade more land for peace.

Egypt, Syria and Saudi Arabia called the Arab summit after last month's election of Netanyahu and initial statements by his right-wing government that they took as a threat.

Netanyahu's policy guidelines reject the return of the Golan Heights to Syria and the creation of a Palestinian state. They also rule out any talk about giving up east Jerusalem, which the Palestinians want as their capital.

The Arabs saw this as a backing away from the land-for-peace formula and from agreements to work toward a full peace with the Palestinians.

Some Arab leaders also have warned that halting the peace process could encourage Muslim militants to resume attacks in Israel or even reignite the Palestinian uprising of the late 1980s and early 1990s.

Egyptian President Hosni Mubarak told CNN on Sunday that peace talks should be restarted ``to avoid terrorism, to avoid violence.''

But his foreign minister, Moussa, said the leaders did not intend their statement to suggest a return to terror.

The statement made clear that the Arab leaders would prefer a quick resumption of negotiations.