Promoters of a $1 billion Iraqi oil pipeline, including National Security Council staff members and Attorney General Edwin Meese III's close friend, E. Bob Wallach, proposed making secret payments to Israel from the Pentagon budget to ensure that Israel would not attack the pipeline, according to informed sources.

The plan was devised in late 1985 after other attempts to ensure the safety of the pipeline project had failed, the sources said. According to memos prepared by Wallach and obtained by The Washington Post, the plan was supported by Meese and endorsed by the late William J. Casey, then director of central intelligence.

"The idea was it was to come out of the defense budget on an installment basis," said one source familiar with the plan. "It was, effectively, to be a payment to the Israelis to be good."

It was this plan, the sources said, that former national security adviser William P. Clark denounced as "a protection racket" when he was consulted about it over the 1985 Christmas holidays. It was reportedly squelched by newly installed national security adviser John M. Poindexter shortly thereafter on Clark's recommendation.

Sources said President Reagan's personal approval would have been required for the payments to have been made, but that he apparently was never told of the proposal.

Wallach's memos, if accurate, indicate that Meese was much more actively involved in the pipeline proposal for a longer of period of time than he has previously acknowledged. Nathan Lewin, Meese's lawyer, has defended Meese's involvement as lawful, proper and extremely limited and said "assertions in the media to date have been exaggerated, misleading, and on occasion, downright false."

Independent counsel James C. McKay is investigating Meese's role in the maneuvering over the pipeline, which was never built, to determine whether he violated any federal laws in the process. McKay also is scrutinizing Wallach's conduct and that of Swiss financier Bruce Rappaport, who hired Wallach as a U.S.-based lawyer-lobbyist to push the pipeline proposal.

In a Dec. 12, 1985, telegram to Rappaport, a Geneva-based multimillionaire, Wallach described the plan to insure the pipeline's safety as "the capital DOD {Department of Defense} package" and said it "appears to be in place." He said it was to be submitted that day by David Wigg, an NSC staff aide, to departing national security adviser Robert C. (Bud) McFarlane.

"It requires a letter from the senior most person in USG {U.S. government}," Wallach said. He expressed skepticism about the outcome, saying that "because of the unprecedented nature, I will believe it when I see it." But he added that he would be meeting Dec. 16, with Rappaport's "golfing partner."

That, sources said, was a reference to Casey. Rappaport was an enthusiastic golfer and he counted Casey, before his death last year, among his partners.

On Dec. 16, Wallach reported to Rappaport about his meeting with Casey.

"The meeting with your golfing partner lasted 45 minutes," Wallach said. "Only D.W. {David Wigg} and I were with him. I had met with D.W. for breakfast and reviewed the DOD documents."

Wallach praised the documents as a "model of simplicity." He said they provide "for full funding within existing guidelines," although he said they had never "been conceived for this purpose."

Of Casey, Wallach said, "he approved the concept with expression as to it being unique in his experience. Please remember this document requires signature of highest authority after recommendation by B.M. {Bud McFarlane} or his successor."

That approval, Wallach continued, had yet to be obtained, but he saw "nothing negative" about that, in light of holidays, "transition events" and other factors.

Wallach then made a reference to Meese, calling him as he usually did in his memos, "my friend."

"I have assurance from my friend," Wallach said, "that if necessary, he will engage new person on project. However, both he and man with whom we met this a.m. {Casey} both feel unlikely B.M. to have acted alone."

Meese, a member of the National Security Council, had asked McFarlane in the summer of 1985 to talk with Wallach about the pipeline and when he agreed, Wallach brought Rappaport to the meeting. McFarlane, according to sources, said the project was important to national security and designated a staff aide to expedite it. By fall, that assignment had fallen to Wigg who was told to report to McFarlane and no one else, sources said.

McFarlane could not be reached for comment yesterday. He resigned as national security adviser on Dec. 4, 1985, but during that month continued to go to his office each day to wind up his affairs. Meanwhile, sources said, his successor, Vice Adm. Poindexter, was still unaware of the pipeline project and Wigg was the only NSC staff aide actively working on it.

Lewin, Meese's chief lawyer, said yesterday that he was not familiar with any plan to guarantee the pipeline's safety with a Defense Department "package."

As for Wallach's reference to getting an "assurance" from Meese that a new person at the NSC would be assigned if needed, Lewin said he was inclined to dismiss it as name-dropping by Wallach.

"From what you tell me, it's what Wallach said to Rappaport," Lewin said. "I do not think that Meese had anything to do, at that time, with the Iraqi pipeline. If Wallach said that to Rappaport, I don't know what he was talking about."

Earlier this week Lewin released several recently declassified documents, including a memo from Wallach to Meese, dated Sept. 25, 1985, describing an "arrangement" with then-Israeli Prime Minister Shimon Peres under which Israel was to get as much as $700 million from the pipeline project over 10 years with a "portion" to be paid directly to Peres' Labor Party.

Peres, now Israeli foreign minister, acknowledged through an aide Tuesday night that Israel had been offered a $65 million to $70 million a year discount on oil purchases over a 10-year period, but said he had failed to pass the offer on to his colleagues because he did not take it seriously. Peres said the offer was made by Rappaport at a secret Sept. 19, 1985, meeting in Israel. Peres denied that Rappaport had proposed paying a portion of the discount to his political party.

The idea of building a pipeline to transport Iraqi oil to the Jordanian port of Aqaba had been "brainstormed" in the State Department in early 1984, according to government documents, to help Iraq export oil and to improve Jordan's economy. The Bechtel Group Inc., a giant American construction firm, won a preliminary Export-Import Bank commitment to help finance the 540-mile pipeline, but the question of protecting the pipeline from potential Israeli attack soon became critical.

Bechtel eventually enlisted Rappaport -- known for his close ties to the Israeli Labor Party and Peres personally -- to try to secure the necessary guarantees from Israel. In return, Bechtel agreed to give Rappaport the right to market 300,000 barrels of oil a day from the pipeline.

With the necessary assurances, the Overseas Private Investment Corp., an agency that insures foreign investments by U.S. companies, was prepared to offer a $400 million insurance package for the project.

OPIC officials had been counting on the "major players," such as Rappaport, Bechtel and Israel, to put up their own money, in turn, to replenish OPIC's coffers in case any insurance payments had to be made to Iraq or Jordan. But one by one, they failed to produce what OPIC wanted.

By October 1985, Wallach, anticipating a visit by Peres to the United States that month, urged OPIC to endorse a new scheme involving payments out of U.S. foreign aid funds appropriated to Israel. But the proposal languished at the Justice Department because of questions about its legality.

Peres, however, was apparently still interested in the project after his visit during which, according to sources, he had a brief conversation with McFarlane and a longer one with Wigg about the pipeline. On Nov. 20, Peres sent McFarlane a letter on his official letterhead saying that his government was prepared "to extend guarantees, to be agreed upon," that the pipeline would be kept "inviolate."

The proposal to dip into the Pentagon budget in some classified manner apparently came to the fore at this point. Sources said Congress would probably not have been notified if it had been approved.

One source expressed confidence that the plan was never brought to Reagan's attention or to that of then-Secretary of Defense Caspar W. Weinberger, a former general counsel of Bechtel. But Wallach's allusion to "DOD documents" suggests that some Pentagon officials may have been involved in drafting the plan.

At the NSC, sources said, Poindexter learned of it for the first time at some point before Christmas and decided to consult Clark, one of his predecessors, about it. Wigg, the sources said, was dispatched, briefcase in hand, to tell Clark about it. Clark reportedly expressed alarm and recommended immediate abandonment.

Wigg, now a Defense Department official, has declined to comment, saying through an aide that he is cooperating with McKay's office. Clark, contacted yesterday in Ireland, said he told McKay the "rationale for my recommendation" but could say no more because the investigation is not yet complete.

"I am further constrained from speaking about the matter for the reason that it involves materials that are still classified," he said.

Just when Poindexter jettisoned the plan for payments to Israel is not clear, but Wallach and, by Wallach's account, Meese, kept working on it.

In a Feb. 3, 1986, message to Rappaport, Wallach said he had recently met with an NSC staff aide about the pipeline as well as the president of Bechtel.

"Both men had to be restimulated on the project, but are now willing to make additional effort," Wallach reported.

As for Meese, Wallach told Rappaport, "I also met with my friend, who will contact J.P. {John Poindexter} to arrange meeting for me, if it is necessary to obtain signature of his superior. I also spoke with D.W."

Wallach also made a reference to Peres, as Rappaport's "friend."

"I suggest no contact with your friend in friendly country until we have sign-off," Wallach said. "We then need to obtain much improved letter from him."

Asked if Meese had contacted Poindexter, Poindexter's lawyer, Richard W. Beckler, declined to comment. Wallach's lawyer, George Walker of San Francisco, could not be reached for comment.

Staff writer Ruth Marcus and staff researcher Michelle Hall contributed to this report.