Attorney General Edwin Meese III was told by his close friend E. Bob Wallach in a September 1985 memo about an "arrangement" with then-Israeli Prime Minister Shimon Peres under which Israel was to get as much as $700 million from an Iraqi pipeline project with a "portion" to be paid directly to Peres' Labor Party.

In the "For Your Eyes, Only" memo, Wallach said Swiss financier Bruce Rappaport, who was promoting the pipeline, had "confirmed the arrangement with Peres" by which Israel would receive $65 million to $70 million annually for 10 years once the pipeline was built.

"What was also indicated to me, and which would be denied everywhere, is that a portion of those funds will go directly to Labor," Wallach added in the two-page, single-spaced memo, dated Sept. 25, 1985.

The long-secret memo, declassified Friday, was made public yesterday by Meese's chief lawyer, Nathan Lewin. Lewin also released a longer memo from Wallach to Meese about the pipeline, also dated Sept. 25, and a handwritten exchange of letters between Peres and Meese. Lewin said that "rather than being incriminating evidence, {the documents} demonstrate that the attorney general's actions with regard to the Iraqi pipeline venture were entirely lawful and correct."

Peres, now foreign minister, initiated the correspondence with Meese, writing him from Jerusalem on Sept. 19. That was the same day the prime minister had a meeting with Rappaport, to whom he gave the note. In it, Peres said he had been following the proposed pipeline project, to run from Iraq through Jordan, "with great interest" and looked upon it as a possible economic benefit to the troubled Middle East.

"I would go a long way to help it out," Peres continued. "But then discretion is demanded on our part . . . . I have asked my friend Bruce and Bob to let you know the whole story, and I shall depend on your judgment about the best way to handle the matter."

Wallach personally delivered the Peres letter to Meese after picking it up from Rappaport in Geneva on the weekend of Sept. 21-22. Lewin said that Peres' letter was "plainly addressed . . . to someone who, he believed, had little or no prior knowledge of the pipeline project."

In his letter, Peres said he wanted to talk to Secretary of State George P. Shultz about the project during an upcoming Peres trip to Washington and said he would appreciate it "if George will be informed ahead of time." Lewin gave no explanation why the head of the Israeli government would send a handwritten letter to Meese through Rappaport and Wallach to do that.

A prolific memo writer, Wallach also gave Meese the "Eyes Only" note and the longer memo he had written on his trip along with the Peres letter.

"I hesitate to provide the following information to you in memorandum form," Wallach said in the shorter, more sensitive note. "I'm constantly torn between my own feelings of privacy and the need to provide you with information in a form which will expedite communication."

Wallach emphasized that Peres was "very sensitive to the letter which he sent" and wanted it back if the U.S. government did not provide a high-level response, including perhaps a meeting with President Reagan.

Independent counsel James C. McKay is investigating Meese's involvement in the project as part of his inquiry into the attorney general's dealings with Wallach, a San Francisco lawyer indicted in December on charges of taking under-the-table payments from a Bronx military contractor to influence Meese.

The maneuverings over the Iraqi pipeline, which was never built, began to come to light last fall when McKay's investigators learned of Wallach's efforts to obtain a favorable ruling from the Justice Department concerning the project.

The Foreign Corrupt Practices Act makes it illegal for U.S. citizens, companies or their agents to offer foreign officials "anything of value" to influence them to provide help in business matters. The law also states that the attorney general "may, in his discretion," file a civil suit if it appears the person or company "is about to engage" in an act that would violate the law.

Rappaport and his Geneva-based National Petroleum Ltd. had entered into a one-year agreement to arrange for "security" for the pipeline project in July 1985 with the Bechtel Group Inc., a worldwide San Francisco-based engineering firm that wanted to build it. Bechtel officials have denied that Rappaport was their "agent" and describe their agreement with him as "a joint venture."

Lewin said in a six-page statement released along with the documents that the reference to payments to the Labor Party did not alert Meese to a potential violation of the law and should not have. He said "the most reasonable inference" to be drawn from the words is that Rappaport, a major backer of the Labor Party, "would be sharing the large amounts of money he would receive" from the pipeline with the Israeli government and the Labor Party.

"There is nothing illegal in that conduct, either under Israeli law or under the Foreign Corrupt Practices Act," Lewin said.

Wallach had been hired by Rappaport in the spring of 1985, sources said, because of his ties to Meese. The attorney general arranged a meeting for the two men with then-national security adviser Robert C. McFarlane, who certified the project as important to U.S. national security interests and assigned an aide to monitor it.

Wallach reminded Meese of that in the longer of his two Sept. 25 memos.

"As you know, this all commenced with the arrangement made by you for a meeting with B.M. {Bud McFarlane}," Wallach said. "At that time there was a very firm and unequivocal commitment by him to the accomplishment of the project on an accelerated basis. You will recall that immediate arrangements were made to work with a member of his staff, a meeting was accomplished by him with the senior person at OPIC . . . and that a way would be found to 'crack the safe.' "

The Overseas Private Investment Corp. (OPIC) is a government agency that insures foreign investments by U.S. firms. Throughout the summer of 1985, Wallach and Julius Kaplan, a Washington-based lawyer for Rappaport, pressed the agency to put together a $400 million insurance package to provide for payments to Iraq or Jordan in case of Israeli attack during the vulnerable construction period.

OPIC officials wanted Rappaport and other "major players" such as Bechtel to put up some money as well, so that OPIC could replenish its coffers in case it had to make any insurance payments. But Bechtel declined and, according to OPIC officials, so did Rappaport.

As a result, Rappaport's attorneys drafted a proposed "letter of comfort" for presentation to Peres on Sept. 19. Drafted for Peres' signature, it would have committed Israel to deposit $50 million in a New York bank and to be prepared to pay $100 million more to reimburse OPIC for any overt act of aggression against the pipeline.

Wallach indicated in his long memo to Meese that Israel was "unable" to do this "on its own." Apparently he learned this from Rappaport on the trip to Geneva.

In a handwritten reply to Peres dated Oct. 7, 1985, Meese said he was "pleased to learn of your interest in the pipeline project, which I believe will be of mutual benefit to the countries involved." He suggested that Peres talk to McFarlane about the pipeline rather than Shultz, who "has had to recuse himself from any matters concerning" Bechtel, for which the secretary of state once worked.

A source close to Meese said the attorney general was surprised to receive the Peres letter, contacted McFarlane to find out what to do, and wrote back to Peres to be polite. Lewin, in his statement, said Meese's letter "demonstrated beyond any doubt that his involvement in the entire matter was limited and passive."

As Washington awaited a state visit from Peres on Oct. 17, 1985, Wallach devised what OPIC officials have called "a wild scheme" to use U.S. foreign aid funds to Israel as the insurance and pressed it with urgency on the eve of the prime minister's arrival.

Wallach told Meese that "the currently scheduled visit of the P.M. is the moment at which the principals should be brought together, at the highest possible level, to conclude the package."

Lewin confirmed that Meese spoke briefly with Peres about the pipeline during a reception in Peres' honor at the Israeli Embassy the night of his arrival. According to sources familiar with McKay's investigation, Peres also brought up the matter with McFarlane and offered to talk to him about it in more detail when both went on to New York, where Peres was to make a speech before the United Nations.

Sources said Peres met in New York instead with a McFarlane deputy who reported that in the Israeli prime minister's view, the project was still "on track." The Iraqis, however, remained cool to the project and it collapsed in late December following McFarlane's resignation as national security adviser early that month.

Lewin said he released the material yesterday to "demonstrate that the assertions in the media to date have been exaggerated, misleading, and on occasion downright false."

He said the documents "prove only that Mr. Meese was informed in writing that the nation of Israel would benefit from its . . . commitment not to bomb the pipeline, that Mr. Rappaport was a strong supporter of the Labor Party, and that he had 'indicated' to Mr. Wallach that he intended to continue contributing to the Labor Party with funds he would obtain from the pipeline project."

As for the phrase -- "which would be denied everywhere" -- that Wallach used in referring to the proposed payments to the Labor Party, Lewin argued that it "did not imply illegality of any kind." He said the idea that the Labor Party "would be receiving indirectly some of the project's proceeds could cause political embarrassment in Israel and was obviously not a matter to be publicized.

"Mr. Wallach frequently used colorful phrases suggesting intrigue and secrecy in his memoranda, even on subjects that were patently innocuous," Lewin added.

Wallach's lawyer, George Walker, said yesterday that Wallach had written at least 400 documents touching on the pipeline matter, including "three or four" to Meese. In the two released yesterday, Wallach referred to "previous memos" that were not released. Walker said some of the Wallach documents were turned over to McKay earlier this month after Rappaport waived any claim that they were protected by attorney-client privilege.

The documents are replete with references to the need to keep their contents secret.

In the longer memo, Wallach describes receiving a phone call from Geneva in which he was "cryptically advised that there was a written message that I was to transmit back to Washington, to an unnamed person, and additional information to be received directly in person." He told Meese he later learned "that the message-letter was directed to you."

Wallach, who refers to Israel in that memo only as "the friendly country," touted Rappaport's importance to the project, noting his importance in obtaining "the never-to-be-stated but fully understood quid pro quo which helped to produce that commitment by the friendly country" not to attack the pipeline.

In his statement, Lewin said the quid pro quo was that Israel would receive "substantial oil" from the pipeline. Rappaport, under his agreement with Bechtel, was to sell the oil. The Iraqis, however, wanted the oil to be bought by U.S. companies.

Wallach told Meese in the longer memo that he was preparing a more sensitive memo for his own files and "will communicate orally the contents of that memorandum" to Meese. Lewin said Wallach provided both memos to Meese on the same day and that the men had a "very brief" discussion about the project that did not include a reference to Labor Party payments.

The Sept. 19, 1985, Rappaport-Peres meeting in Israel came right after the release of the Rev. Benjamin Weir, a U.S. hostage in Lebanon. According to Wallach's "Eyes Only" note, Rappaport "indicates that Peres emphatically indicated that the release of Weir was a result of the efforts of the State of Israel, and no one else."

Weir's release was prompted by 1985 Israeli shipments of U.S.-made arms to Iran. Meese has said he knew nothing about them until the following year.

Wallach also told Meese that he had had "a brief and private conversation" about the pipeline with the late CIA Director William J. Casey and that Casey "had invited me to meet with him in a non-discussion." But Wallach said Rappaport summoned him abroad before the "non-discussion" with Casey could take place.

Staff writer Walter Pincus contributed to this report.