U.S. National Security Advisor Condoleezza Rice yesterday told Dov Weisglass, the prime minister's bureau chief, that deducting the cost of the separation fence from U.S. loan guarantees is not on the agenda.

During a phone call from Rice to ask why Prime Ministers Ariel Sharon and Mahmoud Abbas were not meeting as scheduled, Weisglass asked about the loan guarantee deductions for the separation fence costs, as reported by Haaretz at the weekend.

In Crawford, Texas, where President George Bush is on vacation, his spokesman also said that "at this stage" no decision had been made about the loan guarantees. Spokesman Scott McClellan refused to say if Israel had been given any official notice on the issue and said talk about deducting the fence's cost from the loan guarantees was premature because no decision had yet been made.

However, other sources in the U.S. administration reiterated yesterday that the U.S. is indeed considering deducting the costs of the fence from the loan guarantees as an expression of U.S. displeasure with the fence's route through Palestinian areas.

The possibility of making the deductions is built into the language of the agreement on the $9 billion. According to the agreement, the administration is committed to cutting "dollar for dollar" any of the money that is derived from the guarantees that the government invests in the territories, except for security purposes. The U.S., therefore will have to decide if the fence in its current format is indeed a security fence.

Israeli officials expressed concern yesterday on how the administration is handling the matter.

"A nation is within its rights to put up a fence if it sees the need for one," Secretary of State Colin Powell said yesterday in a broadcast to the Arab world. However, he said, "in the case of the Israeli fence we are concerned when the fence crosses over on to the land of others."