By Barnaby Mason BBC diplomatic correspondent

But US officials have confirmed they are considering whether to reduce a recently approved package of $9bn in loan guarantees, in line with the money the Israelis spend on the barrier.

The Israelis say it is a security fence to stop suicide bombers

Israel gets $2.7bn a year in aid from the United States.

It is a vital subsidy, more so than ever this year when the Israeli Government cut its spending sharply to stop the budget deficit getting out of control.

A few months ago, the US Congress approved the additional $9bn in loan guarantees - a kind of insurance policy to American and other banks which would not otherwise lend the Israeli Government the money it wants.

American legislation in force for more than a decade means this will be reduced by the amount Israel spends on Jewish settlements in occupied territory.

What the Bush administration is now considering is whether to make a similar deduction for the barrier - which is part wall, part metal fence.

The Israelis say it is a security fence to stop suicide bombers; the Palestinians say it is taking more of their land and creating a new de facto border.

President Bush has described the barrier as a problem. The move to penalise Israel financially apparently comes from the State Department.

American officials say it is premature to talk of any decision being made. Some members of Congress have already raised objections.

Vote risk

In any event, cutting the loan guarantees would not have the same impact as reducing a grant of actual money. But there is a strong echo from the past.

In 1991, the first President George Bush suspended loan guarantees when another right-wing Israeli Government refused to stop expanding settlements.

It caused a storm, and some believe it contributed to Mr Bush's defeat in the following year's presidential election.

Now his son, President George W Bush, is winding up his own re-election campaign. He counts on the backing of Christian right-wingers in the United States, and they are among the strongest supporters of Israel.