ISRAEL MIRED IN VERSION OF WATERGATE : SCANDAL COULD TOPPLE GOVERNMENT.

Byline: Alan Sipress Knight-Ridder Tribune News Wire

When Israeli television chose to air the film ``All the President's Men'' last Wednesday night, the prime-time broadcast struck few here as a coincidence.

For five weeks, Israelis have followed the daily revelations of what the national press is calling a homegrown Watergate, an unprecedented scandal that has the potential to topple the government of Prime Minister Benjamin Netanyahu only nine months after he was elected.

Several of his own ministers now say that if Netanyahu is implicated in the accounts of extortion and criminal breach of trust - allegations the prime minister vehemently denies - the government will have to go. Netanyahu reportedly has become the first prime minister ever questioned by police under ``warning,'' an Israeli legal measure that means the subject is considered a suspect in a crime.

In essence, the controversy centers on two questions concerning the appointment in January of a lawyer and Likud Party activist, Roni Bar-On, as Israel's attorney general:

Did a powerful Netanyahu ally named Aryeh Deri, already facing charges of public corruption, demand that Bar-On be named attorney general so Bar-On could arrange a favorable plea bargain - or otherwise Deri would withhold decisive votes for the recent Israel-PLO agreement on Hebron? If so, this would be extortion.

And, second, did Netanyahu agree to the demand? If so, this would be a criminal breach of trust under Israeli law, and not merely routine political deal-making.

All the allegations, if proved, would amount to a plot to make the country's top legal officer beholden to criminals.

``Should it turn out that there is documented evidence for the accusations . . . the government will face an earthquake and perhaps be ripped apart,'' wrote Nahum Barnea, one of Israel's most influential columnists, in the Yediot Aharonot newspaper.

Natan Sharansky, the industry minister in Netanyahu's Cabinet, has said the government will have no moral right to continue even if only ``10 percent of the story'' proves to be accurate. And Dan Meridor, finance minister and ranking figure in the Likud Party, said the affair, if true, would be the most serious incident since Israel was established because the allegations go to the heart of the country's legal system.

Scandal's start

The scandal appeared at first to be little more than a ham-handed effort by Netanyahu to place a Likud loyalist as attorney general, a position traditionally filled by an eminent, independent jurist. The Jan. 10 appointment of Bar-On, best known as the former chairman of Jerusalem's Betar soccer team, provoked a storm of objections from the country's legal community. He resigned after only 12 hours without ever setting foot in his office.

The controversy had quieted when an Israeli television reporter rocked the country two weeks later. She reported that Bar-On's appointment was part of a back-room deal struck by several top political figures now facing criminal prosecution.

At the heart of the scheme allegedly was Deri, the charismatic leader of the ultra-religious Shas Party who is under indictment for fraud, accepting bribes and violating public trust.

According to the television report, Deri wanted to ensure that his marathon trial ended with a plea bargain allowing him to retain his seat in Parliament and perhaps return to the Cabinet, where he'd previously served as interior minister. Deri reportedly won a promise of a favorable plea bargain from Bar-On and got it on tape.

Then, the television exclusive reported, Deri met Netanyahu and his chief of staff Avigdor Lieberman to demand the Bar-On appointment. Otherwise, Deri threatened to order his Shas ministers to oppose the Hebron redeployment agreement and even pull his 10 Knesset members out of the ruling coalition, bringing down Netanyahu's government.

Bar-On was appointed. The Hebron accord narrowly won Cabinet approval with Shas support.

Netanyahu has denied that Deri either suggested or lobbied for the appointment, and he unleashed an unprecedented broadside against the television station.

``These bizarre reports are out-and-out lies. There was no conspiracy and this is an attempt at libel,'' Netanyahu told Israeli television after the initial reports. ``This is entirely baseless, absolute gibberish.''

As the police investigation gains steam, some of the allegations are beginning to appear credible. Recently, prominent criminal lawyer Dan Avi-Yitzhak caused a public uproar when he quit as Deri's attorney.

Avi-Yitzhak sent his client a resignation letter stating, ``I dared for totally relevant reasons to oppose your plan to appoint Bar-On as attorney general.''

Netanyahu interrogated

A week ago, police visited Netanyahu in his office, making him the 22nd person interrogated by investigators about the Bar-On affair, including the justice minister and key advisers in the prime minister's office.

The questioning lasted four hours and did not go smoothly. Police reportedly found Netanyahu's initial answers evasive. After 45 minutes, Israeli television reported, the investigators informed Netanyahu that subsequent questions would be under ``warning.'' The police left his office ``with a bitter taste in their mouth,'' according to press accounts.

Netanyahu has now launched a counteroffensive. He has hired a criminal lawyer and blasted the rash of police leaks about the probe. Under fire, the chief investigator said last week that specific details in the media about Netanyahu's interrogation had been inaccurate. But he declined to refute widespread media reports that the prime minister had been questioned as a suspect.

After top law enforcement officials conferred earlier last week, it now appears likely that police will ask to question Netanyahu a second time. Law enforcement officials have said they hope to complete the investigation within weeks.

The latest disclosures have triggered a flurry of political activity. The opposition Labor Party summoned party activists last week to prepare for the prospect of early elections. Internal Security Minister Avigdor Kahalani, whose Third Way Party is a junior partner in Netanyahu's coalition, said he will demand new elections even if the allegations are only partly true.

Newspapers have broached the topic of the complicated parliamentary procedures required to remove a prime minister from office as a result of a criminal probe.

Netanyahu is striking a defiant pose, advising the Labor Party to put off buying ``new suits'' for early elections.

CAPTION(S):

Photo

Photo: NETANYAHU