TEL AVIV ø Israel appears to have come to a dead end with China over the cancellation of the sale of the Phalcon airborne early-warning system to Beijing.

Israeli officials said they are being faced with a $1 billion compensation claim from Beijing for cancelling the Phalcon deal. They said China has refused to budge from this demand and the United States has declined to intervene.

"The situation is on the verge of spinning out of control," an Israeli defense official said.

The assessment came as Israeli Defense Ministry director-general Amos Yaron leaves for Beijing for a second round of talks on compensation for the Phalcon. Officials said Yaron was sent after a Cabinet discussion led by Prime Minister Ariel Sharon last month.

On Monday, Israeli Defense Minister Binyamin Ben-Eliezer met China's ambassador to Israel, Pan Zhanlin. The Phalcon compensation issue was high on the agenda of the meeting.

"It should be seen as an issue within the family, and not as a crisis between two states," Ben-Eliezer said.

Officials said China presented its compensation claim during a first round of talks in Beijing in early November. In July 2000, Israel, under U.S. pressure, suspended the Phalcon sale to China.

About 14 months later, Israel informed Beijing that the sale had been cancelled and negotiations on compensation began.

"The way the Chinese are presenting this, we can forget about any more trade with Beijing unless the Phalcon compensation claim is resolved," an Israeli official said.

The U.S. rejection of Israel's appeal for aid has angered both officials and parliamentarians. The Knesset's Foreign Affairs and Defense Committee plans to investigate the Phalcon episode. Several parliamentarians, including committee chairman David Magen had visited China to seek a compromise.

"The cancellation of the Phalcon deal is problematic," Magen said. "This is both because of the failure to reach a deal as well as the cancellation demonstrates that Israel has conceded on its independence in international trade. Israel needs to be free from pressure in its dealings with foreign countries, and should not bow to unreasonable pressure from the United States."

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