A secret element in the first arms-for-hostages transaction with Iran was a joint U.S.-Israeli counterterrorism operation in September 1985 that was designed to locate and rescue any American hostages in Beirut who were not freed as a result of the arms shipment, according to informed sources and notes of meetings.

The Rev. Benjamin Weir, released Sept. 14, 1985, was the only American freed by pro-Iranian extremists in Lebanon after Israel delivered 508 U.S.-made TOW antitank missiles to Iran. The rescue never took place because the U.S.-Israeli team in Beirut could not pinpoint the location of the other hostages through the movement of Weir's captors in connection with his release.

But the episode laid the groundwork for future covert Israeli-American projects against terrorism -- joint activities mentioned in the recently concluded Iran-contra hearings, but never publicly explored.

In late August 1985, after Israel had shipped the first 100 TOWs to Iran and set the stage for a hostage release, the National Security Council staff arranged for the State Department to issue an "alias passport" in the name of "William P. Goode" to Lt. Col. Oliver L. North, the NSC's point man on counterterrorism, and was operating in cooperation with Amiram Nir, Israeli Prime Minister Shimon Peres' special adviser on terrorism.

The U.S. ambassador in Beirut reported on Sept. 4, 1985, that "North was handling an operation that would lead to the release of all seven hostages. A {U.S. team} had been deployed to Beirut, we were told," according to information supplied to the Tower review board by Secretary of State George P. Shultz.

In its report, the Tower board cited Shultz's testimony, but did not reveal anything further about the operation, nor did it connect the operation with the arms shipment.

The rescue component of the September 1985 arms shipment was not probed during the just-concluded Iran-contra hearings, but it was known to all the top national security officials, according to sources and State Department notes that have been reviewed by the Iran-contra panels.

On Sept. 17, 1985, according to the notes, "possible military activities" were discussed by North's boss, then-national security adviser Robert C. McFarlane, at a luncheon meeting with Shultz, Defense Secretary Caspar W. Weinberger and then-CIA Director William J. Casey. McFarlane did not mention the TOW shipment at the luncheon, according to the notes. A source familiar with the notes said McFarlane's reference was to the possible rescue attempt.

According to the notes, McFarlane said at that luncheon that, after Weir's release, the hostage release program was "not going anywhere." A source close to McFarlane, however, said the former national security adviser has no recollection of that meeting.

President Reagan and his top advisers have said repeatedly since the arms sales were exposed last November that a main U.S. motive was to create an opening to "moderates" in Iran. But a rescue mission that took advantage of an arms deal would have heightened the mistrust between the two countries and could have endangered not only the American hostages but also the lives of any Iranians associated with it, according to one of the U.S. participants in the hostage negotiations.

The financing of the September 1985 TOW sales by Israel, which made clear that the Iranian government was willing to pay far in excess of cost, created large profits that would be available for other purposes, and thus provided a model for what later became the diversion of such proceeds to aid the Nicaraguan contras.

North's notes and testimony from the Iran-contra hearings suggest, however, that the first ideas for use of such proceeds may have been in the area of joint U.S.-Israeli counterterrorism projects or in relation to Casey's vision for a "self-financing" entity that would be be able to conduct "off-the-shelf" covert projects.

These, North said, would not have been funded with appropriated U.S. government money and thus would not necessarily be subject to U.S. laws or congressional oversight. The initial arms shipments took place amid mounting White House concern and frustration over terrorist activity, including the June 1985 hijacking of TWA Flight 847 and later, the October 1985 seizure of the Achille Lauro cruise ship.

North, according to former colleagues, was impressed with the direct tactics of the Soviet KGB after three Russian diplomats and a doctor were seized, and one of the diplomats murdered, in fall 1985 in Beirut. The three survivors were released in December after the KGB seized relatives of the captors, tortured and killed one of them, and threatened to do the same with the others.

"It's necessary to attack terrorists directly, but U.S. laws on the books make that difficult to do," said a North colleague last week. "It's illegal to assassinate {terrorist leader} Abu Nidal, but we can bomb Libya and kill some innocent people to make a point against terrorism."

North, according to entries in his notebooks, had dealings with Nir as early as June 1985.

On Jan. 7, 1986, according to an entry in North's notebook, he was called by Nir. "Regarding the first 504 {the September 1985 TOW shipment}, it was agreed that the $ {money} was used for other purposes," North wrote. This appears to be a reference to the fact that somebody in the U.S. government had authorized the Israelis to use a portion of the $5 million received from Iran for something other than purchasing missile replacements.

During Nir's visit to Washington just before that, the Israeli counterterrorism specialist "indicated the desire to use the residuals {profits from future arms sales to Iran} for other activities," North told the Iran-contra panels. North said that he had "sought approval from my superiors for those operations," and had discussed them with Casey.

On the eve of a September 1986 visit by Prime Minister Peres, North suggested that Reagan be briefed on certain "sensitive" joint initiatives involving the hostages. North, who testified that these were paid for by arms sales proceeds, provided details at a closed session of the committees.

The military rescue option was considered in June 1986, immediately after a delegation to Tehran headed by McFarlane delivered a partial shipment of Hawk antiaircraft missile parts but failed to secure the release of the remaining U.S. hostages.

On June 6, Reagan approved military planning to rescue the hostages, and Rear Adm. John M. Poindexter, McFarlane's successor as national security adviser, asked Casey to intensify efforts to locate them, according to the Tower board.

Poindexter wrote North, "I am beginning to think seriously about a rescue effort for the hostages. Is there any way we can get a spy into the Hayy Assallum area . . . ? Over a period of time we could probably move covertly some people into Yarze." Both areas are in the immediate outskirts of Beirut.

According to the Tower board report, North noted that retired major general Richard V. Secord had been working with Nir and "now has three people in Beirut and a 40-man Druze force working 'for' us. Dick rates the possiblity of success on this operation as 30 percent, but that's better than nothing."

Shortly thereafter, on June 20, $500,000 from the U.S.-Iran arms sales was paid by Secord's Swiss bank account to Monzer Alkassar, an arms trader reputed to be an associate of the Palestine Liberation Organization's Muhammad Abul Abbas, mastermind of the Achille Lauro hijacking, according to financial records released by the Iran-contra panels.

But the same records show an earlier transaction with Alkassar -- $1 million on Aug. 30, 1985, just before the planned September 1985 U.S.-Israeli rescue attempt. Committee records list the purpose of the payments in both cases as arms purchases.

In September 1986, during negotiations with North, a new group of Iranian intermediaries said that the Lebanese captors "are very worried about a CIA operation to rescue the hostages." The chief Iranian spokesman "urged that we not do anything to fan their fears, as this could make his job harder," according to notes taken at the meeting by a U.S. participant.