ISRAELI POLICE URGE INDICTMENT OF NETANYAHU : NETANYAHU'S OPTIONS.

Byline: Barbara Demick and Alan Sipress Knight-Ridder Tribune News Wire

In the biggest political corruption scandal ever to hit Israel, police have recommended indicting Prime Minister Benjamin Netanyahu on charges of fraud and breach of trust, say several government officials and Netanyahu's lawyer.

Although the recommendation could be rejected by Israel's state attorney, the scandal already threatens to topple the 10-month-old Netanyahu government and further complicate an already muddled Mideast peace process.

``It amounts to an earthquake,'' Shimon Peres, whom Netanyahu ousted as prime minister last year, said in an interview Wednesday with Israeli radio.

Peres and other opposition leaders are calling for new elections, contending that Netanyahu cannot carry out his duties with the scandal hanging over him. In addition to Netanyahu, the police have recommended indictments against three of his top allies - his chief of staff, justice minister and the leader of the second-largest party in his governing coalition.

Meanwhile, members of the smaller political parties that make up Netanyahu's ruling coalition government are threatening to bolt because of the alleged political shenanigans unearthed in the investigation.

The indictment recommendation, contained in a 995-page police report based on three months of investigations, was confirmed Wednesday night by Israeli Police Chief Asaf Hefetz, who told Israeli radio, ``This is not a happy day for Israel.''

If carried out, the indictment would be the first of a sitting Israeli prime minister.

Netanyahu has derided the allegations as ``entirely baseless, political gibberish.''

Wednesday night, Netanyahu's attorney, Yaacov Weinroth, confirmed that the police had recommended an indictment, but he predicted the state attorney would reject bringing charges.

``There are doubts about whether they will adopt it, whether they will approve it,'' Weinroth said. ``There are differences of opinion about it.''

State Attorney Edna Arbel, Israel's top prosecutor, had recommended that the report be made public Sunday. A decision on whether to indict the prime minister could be forthcoming before next week's Passover holiday.

The confirmation of the indictment recommendation dampens widespread speculation before Wednesday that the opposition Labor Party would join with Netanyahu's Likud Party to form a national-unity government designed to move the peace process forward.

At issue is a political scandal as tangled as Watergate - a case of back-room horse-trading that might sound comparatively mild by the standards of American politics.

It is alleged that Netanyahu appointed a political crony, Roni Bar-On, as attorney general at the insistence of religious party leader Aryeh Deri. At the time of the appointment, Deri was under indictment for public corruption.

The alleged deal was that Bar-On would give Deri a favorable plea bargain, allowing him to continue his political career. In return, Deri's religious Shas Party would give Netanyahu the decisive votes he needed in his Cabinet for a military redeployment in the West Bank town of Hebron. With the decisive support of Shas, the redeployment was approved in January.

Bar-On's appointment as attorney general caused an immediate uproar; the position is normally reserved for a distinguished jurist. Bar-On resigned a day later without setting foot in the attorney general's office. Soon afterward, Israeli television reported an alleged illicit deal, and a police investigation was launched.

The police report is said to recommend the indictments of Justice Minister Tsahi Hanegbi and top aide Avigdor Lieberman as well as Deri. Hanegbi reportedly would be charged with breach of trust for allegedly misleading the Cabinet about Bar-On's qualifications, Lieberman with breach of trust for his alleged role in relaying Deri's threats to Netanyahu, and Deri for alleged blackmail.

The original charges against Deri of fraud, accepting bribes and violating the public trust still are pending.

The police reportedly questioned more than 60 witnesses, including Netanyahu himself, in the course of the three-month investigation.

The scandal, which has dominated the headlines of Israeli newspapers for the past three months, is without question the biggest of its kind to hit Israel.

Regardless of whether an indictment is brought, the scandal threatens to cost Netanyahu the fragile majority he commands in the Knesset, the Israeli parliament. He controls 66 of 120 seats through a coalition of allied parties.

Several coalition members - including Natan Sharansky of the seven-seat Yisrael B'Aliya Party - have said they will withdraw from the Netanyahu government if the allegations disseminated in press reports are shown by the police to be founded.

Netanyahu could try to govern with a minority, but could not continue if a Knesset majority approved a no-confidence vote against him. That would send Israeli voters back to the polls less than a year after Netanyahu replaced the previous Labor government of Peres. It is not certain that either Netanyahu or Peres would represent their parties if a new election were called.

The new Likud standard-bearer could be popular Defense Minister Yitzhak Mordechai or Finance Minister Dan Meridor, while Labor probably would be represented by former Foreign Minister Ehud Barak.

The next national vote is required by 2000.

Netanyahu is especially vulnerable at the moment because of what his detractors consider his bungled handling of the peace process. Implementation of the 1993 peace accords with the Palestinians have hit an impasse since the Netanyahu government's decision to break ground last month for a 6,500-unit Jewish settlement in East Jerusalem.

U.S. peace envoy Dennis Ross met with Netanyahu earlier Wednesday, before news broke of the police recommendation, and then headed to Gaza City for a meeting with Palestinian leader Yasser Arafat. But it is unclear what can be accomplished on the diplomatic front when the entire Israeli government is in a state of crisis.

Israeli radio reported late Wednesday night that Arafat's political adviser, Ahmed Tibi, told him, ``This is a whole new era on the political scene.''

Israeli Prime Minister Benjamin Netanyahu's options under Israeli electoral law if he is indicted, says Professor Uriel Reichman, former dean of the law faculty at Tel Aviv University. Reichman was a key lobbyist and author of the new electoral law:

MUST NETANYAHU STEP DOWN?

No. Under Israel's law on the direct election of the prime minister, there is no explicit requirement that the prime minister step down if indicted - or even convicted.

CAN THE PRIME MINISTER BE REMOVED FROM OFFICE?

Yes, in three ways:

1. By a majority of 61 out of 120 Knesset members, in which case new elections are held within 60 days for both premier and parliament - meaning the lawmakers must be prepared to sacrifice their own positions as well as the premier's.

2. By a special majority of 80 out of 120 members, in which case the Knesset serves out its full four-year term and only elections for a new prime minister are held.

3. If a prime minister has been convicted of a crime that ``carries with it disgrace'' - such as fraud and breach of trust, the infractions attributed to Netanyahu - he can be impeached without dissolving the Knesset by a simple majority of 61.

WHAT IF NETANYAHU QUITS?

If Netanyahu resigns, elections will be held within 60 days for the prime minister only; the Knesset would serve out its term, through 2000.

CAPTION(S):

Box, Photo

PHOTO (color) NETANYAHU

BOX: Netanyahu's options (see text)