Attorney General Edwin Meese III said yesterday that his involvement with a proposed Iraqi pipeline project was "entirely lawful, proper and responsible," and that a 1985 memorandum from his close friend, E. Bob Wallach, raised "no grounds" for questioning the proposal.

Meese said he felt "compelled, for this one time," to take the unusual step of commenting publicly on the investigation being conducted by independent counsel James C. McKay. He said he was responding to "a cascade of misinformation, false headlines, half-truths, innuendo and misunderstanding of the law" prompted by reports that McKay is focusing on a 1985 memo in which Wallach allegedly detailed a plan to make payments to the Israeli Labor Party to secure a guarantee that Israel would not attack the proposed pipeline.

Reading from a prepared statement at the Justice Department, Meese said Wallach regularly sent him memos on an array of subjects and that he "rarely had time to read them thoroughly, particularly when they dealt -- as these two did -- with subjects outside my responsibilities as attorney general. I do not recall having read the specific words that have now mushroomed into importance, but I certainly did not receive from the memorandum any impression of illegality whatsoever."

In Israel yesterday, Foreign Minister Shimon Peres' office disclosed that in 1985 Meese sent a handwritten letter on official stationery to Peres, then the prime minister, notifying him that Secretary of State George P. Shultz was unable to deal with Israel on the pipeline issue because he had been a top official of Bechtel Group Inc., the San Francisco-based company which proposed to build the pipeline, Glenn Frankel of The Washington Post Foreign Service reported from Jerusalem. Meese said in the letter that all contacts on the matter would be with then-national security adviser Robert C. McFarlane.

A source familiar with McKay's inquiry said Meese's letter was sent in October 1985.

A senior State Department official said yesterday that it was unusual for the attorney general to communicate directly with the head of a foreign government. A former official familiar with the pipeline said the State Department was involved in the pipeline through the spring of 1985, when it became clear the Iraqis had cooled to the project.

Meese, who canceled a planned speech to high school students to confer with his attorneys before making the statement, said he was "convinced" that McKay's inquiry into his role in the pipeline project "will inevitably result in a conclusion favorable to me."

Meese's optimistic outlook contrasted sharply with the portrayal of his situation by other administration officials. Sources familiar with McKay's investigation have said he informed senior White House aides last week that the investigation has become serious.

In his five-page statement, Meese described his role in the pipeline matter as "extremely limited," saying it "consisted principally" of referring Wallach to McFarlane. Meese also said he had two contacts with an Israeli official in the fall of 1985. "Each was brief and limited, and neither was initiated by me," Meese said.

Meese said he could not describe Wallach's memo in detail because it is classified, but "I can tell you that the language in Mr. Wallach's memorandum that has given rise to this speculation consists of 10 words in one of two long documents that he provided me on the same day to fill me in on what had transpired in the pipeline matter."

Meese said that "as I look at the full memorandum containing those 10 words today, I do not believe that it fairly implies that a violation of law was committed or contemplated in connection with the pipeline. It contains no reference to 'bribes' or 'payoffs.' " Meese declined to answer questions, walking out of the briefing room as a reporter yelled a question about whether he would resign.

James Rocap, Meese's attorney, said he could not explain why the Wallach memorandum is classfied but that "nobody in the A.G.'s office was involved" in the decision to make it classified. "He's not classifying this so that nobody can see it," Rocap said.

Steven Garfinckel, director of the Information Security Oversight Office of the General Services Administration, said it was "unusual" for a memorandum from a private individual to become classified but that he was not familiar with the circumstances of the Wallach memo.

"One of the factors that has to exist before information may be classified is that the government must own or otherwise control the information," Garfinckel said.

In Jerusalem, an aide to Peres also disclosed that Peres had written McFarlane a three-paragraph typewritten letter Nov. 20, 1985, informing him that Israel agreed not to object to construction of the pipeline and stating that Israel had received guarantees from McFarlane that every effort would be made to preserve the environment of the area where the pipeline would be built.

The Peres aide said he could not release the text of the two letters for legal reasons. The aide also repeated "our total, unequivocal denial of the ludicrous, outrageous and totally unsubstantiated accusations" that pipeline organizers may have sought to bribe Peres or his Labor Party. "No money or anything of value was offered or given to Mr. Peres or to the Labor Party," the aide said.

"We think even the allegation of such a thing is an insult to Mr. Peres," said the aide, and has been made "only because somebody is out to get Meese and Mr. Peres ends up getting the flak."

Israeli sources said over the weekend that Peres had also had an exchange of letters with Iraq's ambassador to the United States at the time. Yesterday, the current ambassador, Abdul Amir Alambiri, denied the report. "There was no exchange of letters or direct or indirect contact between Israel and Iraq on this project," he said.

The pipeline was to run 540 miles from Iraq's Kirkuk oil fields to the Jordanian port of Aqaba near the Red Sea. Bechtel brought in Swiss businessman Bruce Rappaport, who has close ties to prominent Israeli figures, to help.

Rappaport in turn hired Wallach, Meese's friend of 30 years. Wallach was indicted by a federal grand jury in New York shortly before Christmas on racketeering, fraud and conspiracy charges for allegedly extracting payments from Wedtech Corp. in order to influence Meese and other federal officials.

Meese said yesterday that when Wallach "sought my advice in May of 1985, I referred him to Mr. McFarlane, and consideration of the project thereafter on behalf of the United States was handled, as it should have been, by the National Security Council staff."

McKay began investigating Meese last May as part of his Wedtech probe. Meese said he was "gratified" when McKay announced on the day of Wallach's indictment that "he had effectively concluded the Wedtech phase of his investigation with a favorable result."

What McKay said was that he had "insufficient evidence as of this date" to prove that Meese "knowingly participated in criminal activity" but cautioned that "this is an interim and not a final decision."

Yesterday McKay told the Associated Press that he had felt it was his "duty" to inform White House chief of staff Howard H. Baker Jr. of the investigation.

"When we learned last week that there was going to be publicity on these matters regarding certain sensitive aspects of our investigations, I felt that in my position as independent counsel it was my duty to inform Sen. Baker of this matter so that he could, if he wishes, give the president such information and advice as he deemed advisable," McKay said. He said he gave Baker "a brief summary of the events, matters, relating to the investigation."

"We are proceeding with this investigation as expeditiously as possible and hope to wind it up within a reasonable period of time," he said.

Staff writer Don Oberdorfer contributed to this report.