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The New York diamond dealer Yakov Arabov was arrested last week on charges of laundering $270 million in drug money.

"Jacob the Jeweler," one of the largest jewelers in the Jewish community, called the charges a regrettable misunderstanding. Arabov, who goes professionally by Jacob Arabo, was freed on $100,000 bail and promised not to leave the country.

But law enforcement sources said that the suspicions are far stronger than a "misunderstanding," and that Arabov's company, Jacob & Co., was used by a Detroit drug ring to launder its proceeds.

Sixteen other members of the alleged ring were arrested along with Arabov.

According to the New York press and sources in the diamond business in Israel, Arabov immigrated to the United States from Uzbekistan at age 14 and obtained work polishing diamonds in Manhattan. Arabov eventually went into business on his own, opening a jewelry store that catered to the upper class and becoming known for extravagant designs.

Arabov is known to the rap music industry as the Bling King; his clientele includes such prominent athletes such as Allen Iverson and Derek Jeter and jet-setters Madonna and Elton John.

Local diamond sector sources said that one of Arabov's financiers is Israeli diamond dealer Erez Daleyot, who, they added, owns 50 percent of Arabov's jewelry business.

Some sources claimed that Daleyot's De Beers sight is courtesy of his declared partnership with Arabov. De Beers demands that sightholders demonstrate ties with diamond jewelers, to ensure what is known as the downstream sale of the diamonds purchased in the unique De Beers "as is" sales.

Daleyot, operating out of Antwerp, is considered one of the world's leading diamond dealers, with annual sales topping $200 million, according to Israeli estimates. But Daleyot and Belgian Jewish partner Maurice Tempelsman are both known for their integrity, so it is unlikely that they knew of Arabov's alleged illegal activities.

Daleyot was unavailable for comment yesterday.