JERUSALEM (Reuters) - A U.S. peace envoy’s suggestion that Washington could penalize Israel financially to force it to make concessions to the Palestinians drew Israeli ire on Sunday.

U.S. Middle East envoy George Mitchell reads a statement after his meeting Syria's President Bashar al-Assad in Damascus July 26, 2009. REUTERS/ Khaled al-Hariri

“Under American law, the United States can withhold support on loan guarantees to Israel,” George Mitchell said on U.S. television on Wednesday after being asked about the kind of pressure that could be brought to bear on Israel.

Over the past two decades, Israel has received U.S. guarantees covering billions of dollars in loans, underwriting that has enabled it to raise money overseas more cheaply.

Although such guarantees have slipped in importance and Mitchell made clear in the U.S. public television interview that no sanctions against Israel were being considered, his remarks added more discord to Israeli relations with President Barack Obama’s White House.

In a statement late on Saturday “in reaction to media inquiries after Mitchell’s interview,” Prime Minister Benjamin Netanyahu’s office blamed the Palestinians for a peacemaking impasse which the envoy, due back in the region later this month, has been unable to break.

“Everyone knows that the Palestinian Authority refuses to renew peace talks, while Israel took significant steps to restart the process,” the statement said.

Speaking to reporters in Jerusalem, visiting U.S. Senators Joe Lieberman and John McCain rejected Mitchell’s remarks.

“Any attempt to pressure Israel, to force Israel, to the negotiating table by denying Israel support will not pass the Congress of the United States,” said Lieberman, an independent.

Republican Senator McCain, who lost the 2008 presidential election to Obama, added: “We disagree, obviously, with that comment and I am sure that you will see the administration in the future say that is certainly not the administration’s policy.”

‘BOMBSHELL’

Israeli media seized on Mitchell’s remarks as reminders of a low point in U.S.-Israeli relations -- President George Bush’s withholding of $10 billion in guarantees in 1991 after Prime Minister Yitzhak Shamir refused to freeze settlement expansion.

“Mitchell’s threat,” said the main headline of Israel’s mass circulation Maariv newspaper, which described the envoy’s comments as a “bombshell.”

Obama and Netanyahu have clashed over the president’s demand -- since softened -- that Israel halt all settlement activity on land captured in the 1967 war, in line with a 2003 U.S.-backed peace ‘road map’ that also called on the Palestinians to rein in militants.

Nabil Abu Rdaineh, a spokesman for Palestinian President Mahmoud Abbas, rejected the accusation that the Palestinians were to blame for a lack of progress toward a statehood deal.

“Israel continues settlement building in violation of the road map,” Abu Rdaineh said.

Under pressure from Obama, Netanyahu imposed a limited, 10-month moratorium on November 25 on housing starts in West Bank settlements, saying he hoped this would help restart negotiations suspended for the past year.

But he excluded East Jerusalem and nearby annexed areas of the West Bank, and Abbas has not budged from his demand for a complete settlement freeze before talks can resume.

Asked about Mitchell’s remarks, Israeli Finance Minister Yuval Steinitz called U.S. loan guarantees a “token of friendship” but said Israel had no plans to use those available for 2010 and 2011.

In 2002, the United States provided a package of $9 billion in loan guarantees. The package included a formula that deducts a dollar of guarantees for every dollar Israel spent on settlement building.

As of December 15, Israel still had $3.148 billion of the guarantees available after issuing $4.1 billion in bonds backed by the United States and a $1.1 billion deduction for settlement building and concerns over the barrier Israel is building in the West Bank.