U.S. officials were told in September 1985 of a plan to have Israel deposit $50 million in a New York bank account as security against Israeli sabotage of a proposed $1 billion Iraqi pipeline.

The plan, which also stipulated that Israel would be prepared to pay $100 million more if damage to the pipeline was more extensive, was set forth in a "letter of comfort" that was to be submitted to Israeli Prime Minister Shimon Peres for his signature.

Peres evidently never signed the letter, which was drafted by a lawyer for Swiss multimillionaire Bruce Rappaport. But it may have been the guarantee that aides to Peres have said was considered by Israeli officials in late 1985 before the pipeline project collapsed when the National Security Council (NSC) dropped its support.

Rear Adm. John M. Poindexter, who became President Reagan's national security adviser that December, killed it after being told it had been transformed into "a protection racket." By then, the idea of Israel putting up any cash had disappeared.

The international maneuvering over the pipeline has come under intense investigation by independent counsel James C. McKay because of the roles played by Attorney General Edwin Meese III and his longtime friend and unofficial adviser, E. Bob Wallach. McKay is focusing on a 1985 memo to Meese in which Wallach allegedly outlined a plan to make payments to the Israeli Labor Party, headed by Peres, to cement a pledge that Israel would not attack the pipeline.

Wallach had been hired to work on the project in the spring of 1985 by Rappaport, sources say, because of Wallach's close ties to Meese. Rappaport had been brought into the project by the Bechtel Group, the company that wanted to build the pipeline, because of his experience in security bonding and his close ties to Israeli political figures, including Peres.

A Geneva-based financier and shipping magnate, Rappaport yesterday issued a statement denying making any payoffs or engaging "in any unlawful or improper activity regarding the pipeline project." He denounced what he called "untrue and unfounded reports" claiming he has close ties with U.S. and Israeli intelligence sources and that he has had "questionable business dealings." He said he has instructed his attorneys to inform him whether legal action should be taken.

The statement was made in response to inquiries by The Washington Post about the "letter of comfort" for Peres and how he came to know Wallach. Rappaport did not address either of those points.

"He wouldn't tell me," said his spokeswoman and daughter, Irith Rappaport. "I asked him. We didn't get any reaction."

The letter was drafted for Rappaport by Julius Kaplan, a Washington lawyer who was retained by the Swiss businessman along with Wallach. Kaplan told a New York associate about it in a Sept. 17, 1985, letter. Copies were sent to Wallach, Rappaport and officials of the Overseas Private Investment Corp. (OPIC), a government agency that insures foreign investments by U.S. firms. Its contents were described to The Post.

At that point, Israeli officials had not seen the proposal, but Kaplan said a copy might be provided "to the government of Israel" on Sept. 19, 1985.

Under the "proposed letter of comfort from the prime minister to the U.S. government," Israel was to confirm that it would not commit "an overt act of aggression" against Iraq or Jordan that was the direct cause of interrupting the construction or operation of the pipeline. As proposed, the pipeline was to run close to Israeli territory, from Iraq's Kirkuk oil fields to the Jordanian port of Aqaba near the Red Sea.

OPIC and a New York bank were, in turn, to set up a $400 million insurance fund in case Israel was found by an independent arbitration panel to have breached its commitment.

To offset payments from that account, Peres was to agree to place $50 million in an account of the state of Israel "or any agency thereof" in a New York bank so that funds would be immediately available upon payment of a claim by OPIC.

The proposal also called for Peres to pledge reimbursement of up to $100 million more over a four-year period if the payments by OPIC ran higher.

It could not be determined whether the proposal was presented to Peres, now Israeli foreign minister, or whether it would have been legally binding under Israeli law if he had signed it.

"We are not commenting on proposals made to us," an aide to Peres told Washington Post correspondent Glenn Frankel in Jerusalem this week. "We comment on what we did. The rest you'll have to ask them about."

Rappaport, a friend of Peres for 45 years, described the pipeline in his statement yesterday as "a viable business deal," but a former State Department official familiar with the project scoffed at the idea and said the project was really "a dead letter" by the end of 1984, before Rappaport became involved.

"By then, the Iraqis had been frightened away by the Israelis," this official said. "The Iraqis told Bechtel, 'If you, Bechtel, promise to produce a pipeline in which we have no money up front and no risk, come talk to us.' "

Rappaport appeared on the scene in January 1985 in London, where Bechtel has overseas headquarters. Washington Post correspondent Karen DeYoung reported from London that Rappaport was introduced to the company by the London representative of Nissho Iwai, a major Japanese trading company that had done business with Bechtel in the past.

A few weeks later, Rappaport produced a letter from Peres to "the president of National Petroleum Ltd." {Rappaport} in which he promised not to disrupt the pipeline, according to Bechtel spokesman Tom Flynn, who said company officals were impressed.

Rappaport then hired Wallach, who used his connections with Meese, a member of the NSC, to get a meeting with then national security adviser Robert C. McFarlane in late June 1985. Meese reportedly stated that Wallach was working on a proposal that seemed to have promise, according to sources familiar with McKay's investigation.

McFarlane had the impression from his aides that only Wallach would be coming, sources say, but Rappaport came along, too, and was introduced as a businessman and close friend of Peres. According to the sources, McFarlane told them what they wanted to hear, that the project was important to U.S. national security, and Wallach said they would take it from there.

Sources say McFarlane then assigned an aide, Roger Robinson, to guide the proposal for the NSC without telling anybody else about it.

"This was a typical McFarlane operation," one former official said. "Keep it secret from everybody. There's an interesting parallel between this and the Iran arms thing. If you can't do something that will bear scrutiny in the normal channels of government, then you go off, stamp 'national security' on it and do it in secret."

Even worse, this official said, "they were spinning on their own axis. Nobody was talking to the Iraqis. And the oil had to come from Iraq."

Instead, officials at OPIC, acting at the behest of McFarlane, began trying to put together a $400 million insurance package in case of attack by Israel. The idea was for those who stood to benefit, including Rappaport, to share the risk with OPIC, but officials said Rappaport backed away from an Aug. 29, 1985, commitment to OPIC that Kaplan had initialed on Rappaport's behalf. And Israel never committed the cash envisioned in the letter of comfort.

State Department officials regarded the effort as ludicrous. Said one: "The Israelis have repeatedly told a succession of administrations that when it comes to judgments of national security, they will make them alone and it is none of our business. When it comes time to bomb the pipeline, in other words, they will do it. No government can guarantee the behavior of another government. To think otherwise would be naive."

Wallach, meanwhile, was puffing his chest, sources say. On a Bechtel-sponsored trip to Jordan as Rappaport's representative, according to those familiar with the visit, Wallach went out of his way to to imply that he was working for the NSC and carrying "special messages" for some people. Later, others say, he cut out Rappaport's other lawyer, Kaplan, telling Kaplan there were matters he could not be told because he did not have a security clearance.

Peres arrived in Washington for an official visit Oct. 16, 1985, while Wallach was trying to sell OPIC on what officials there called "a wild scheme" -- using U.S. foreign aid to Israel for payments, by way of OPIC, to Iraq or Jordan in case of an Israeli attack. According to informed sources, McFarlane has told investigators he was busy preparing for the upcoming Geneva summit and paid little attention at any point to the pipeline project, but Peres reportedly told him during the visit here that Israel was prepared to continue to search for a way to assure its safety.

Meese had told Peres in a letter that month that all his contacts should be with McFarlane since Secretary of State George P. Shultz had been a top official of the Bechtel Group and was not involved in the pipeline. In fact, the State Department, with Shultz formally recused, had signed off on many cables about the pipeline. But Peres, sources say, singled out McFarlane and invited further discussion in New York where both were going to the United Nations.

David Wigg, an NSC aide who succeeded Robinson, ended up talking with Peres in New York in McFarlane's place and, sources say, reported that the pipeline remained on track. On Nov. 20, Peres wrote McFarlane a short letter saying Israel agreed not to object to construction of the pipeline and adding that Israel had received guarantees from McFarlane that every effort would be made to preserve the environment.

McFarlane was on the West Coast at the time. Shortly thereafter, on Dec. 4, 1985, he resigned, telling friends he was worn out by the rigors of the job and battles with White House chief of staff Donald T. Regan. But Wigg reportedly continued to promote the pipeline even though it was clear by then that dipping into U.S. foreign aid funds was not practical. Sources say Poindexter, when he succeeded McFarlane, knew nothing about it, and contacted former national security adviser William P. Clark for his advice in late December or early January. Wigg was sent over to see him.

Clark, sources say, was startled by the description Wigg gave him and called it "a nightmare" as well as "a protection racket." Sources say it had gone beyond the idea of dipping into foreign aid funds, but they declined to be more specific.

Staff researcher Michelle Clark contributed to this report.