Jordan would be the primary beneficiary of the fund, as a sign of appreciation for its warmer peace with Israel, according to U.S. and Israeli sources.
The cut in Israel’s $3 billion in aid could be offset by additional military spending for the Jewish state.
Nonetheless, it would mark the first reduction since 1979, when Jerusalem began receiving significant U.S. aid in the wake of its peace treaty with Egypt.
The shift in funds, which is being supported by Israel, also comes at a time when some have questioned whether Israel, which is experiencing a healthy economy, should continue to receive $1.2 billion in annual economic aid.
Israel, which also receives an annual $1.8 billion in military aid, is the largest recipient of U.S. foreign assistance. Egypt, which receives $2.1 billion, is the second largest recipient.
Even Israeli Prime Minister Benjamin Netanyahu told a joint session of Congress last year that before his term is completed, Israel would be ready to wean itself from its dependence on U.S. aid if the Israeli economy remains strong.
So delicate are the talks on the plan to cut aid that Howard Kohr, executive director of the American Israel Public Affairs Committee, traveled to Jerusalem last week for consultations, according to Israeli sources.
For almost two decades, AIPAC, the pro-Israel lobby — along with many other Jewish organizations — has made aid to Israel the cornerstone of its political activities.
For that reason, even if the new fund is well-intentioned and supported by Israel, a cut in aid to the Jewish state would require a significant shift in American Jewish lobbying efforts.
Clinton and Netanyahu have spoken in recent weeks about the proposed aid cut, and Israeli Foreign Minister David Levy confirmed Netanyahu’s support in principle during a meeting with Secretary of State Madeleine Albright last week.
“Aid to Jordan is a mutual desire of the United States and Israel. It’s an important link to strengthen the peace process,” Levy told reporters. “I’m sure we will find a common way in order to achieve this goal.”
When asked about the plan, Albright said, “The prime minister shares an interest in establishing a fund for Middle East peace and security.”
She added, “We are now examining, with the Israelis, details on how best to move forward on this.”
The plan arose out of a desire to increase aid to Jordan, which this year received $47 million in U.S. aid. The Clinton administration has asked for $75.6 million for next year.
Under congressional budget rules, any new spending must be offset by an equal cut in other programs.
Given the current budgetary pressures, Congress would be unlikely to approve a foreign aid package that includes as much as the administration thinks the Hashemite kingdom needs.
The Middle East already receives nearly half of the total $12 billion in global U.S. assistance.
In addition to providing Jordan with a substantial amount of U.S. aid, the fund would send an important signal to Arab countries that making peace with Israel still carries a “monetary dividend,” according to a State Department official.
Officials said that in addition to the $100 million taken from aid to Israel and Egypt, the fund would include $150 million contributed by U.S. allies.
Much of that $250 million fund, perhaps 90 percent, would go to Jordan to show appreciation, Israeli and U.S. sources say. The Palestinian Authority could also benefit from the fund, although the fund’s architects have yet to settle all the specifics.
The United States hopes to provide Jordan close to $500 million in aid over five years from the Egyptian and Israeli reductions. With European and Japanese aid, the total could top $1 billion.
Egyptian officials refused to comment on the plan, but U.S. officials said that Cairo, like Jerusalem, would agree if both countries sacrificed aid.
Congressional aides who specialize in foreign aid said lawmakers, who must back the plan, likely would accept it if Israel and AIPAC did.
However, some legislators would likely oppose any more aid to the Palestinians, arguing that they have not kept their commitments to the peace process.
Although U.S. officials would not discuss details of the fund, they said that the aid cut is not tied to the stalemate in the peace talks.
Although most Jewish officials said they would support Israel’s position, a Republican Jewish group blasted Clinton for urging aid cuts.
Aid to Israel “has been sacrosanct,” said Matthew Brooks, executive director of the National Jewish Coalition. The implications of a president recommending such a cut “are potentially worrisome,” Brooks added.
Others expressed concern that the plan could set a precedent for further cuts.