DATE=4/16/98 TYPE=CORRESPONDENT REPORT NUMBER=2-229741 TITLE=ISRAEL INTELLIGENCE CHIEF (L ONLY) BYLINE=MARK LAVIE DATELINE=TEL AVIV CONTENT= VOICED AT: INTRO: THE CHIEF OF ISRAELI ARMY INTELLIGENCE SAYS HE BELIEVES PALESTINIAN PRESIDENT YASSER ARAFAT HAS MADE IT CLEAR TO THE MILITANT HAMAS GROUP THAT THERE MUST BE NO TERROR ATTACKS ON ISRAEL FOR NOW. MARK LAVIE IN TEL AVIV REPORTS THIS WOULD FULFILL ISRAEL'S MAIN DEMAND OF THE PALESTINIANS. TEXT: "ABSOLUTELY," ANSWERED THE ISRAELI MILITARY INTELLIGENCE CHIEF, MOSHE YA'ALON, WHEN ASKED IF YASSER ARAFAT HAS ORDERED A "RED LIGHT" ON TERROR ATTACKS. GENERAL YA'ALON TOLD THE ISRAELI NEWSPAPER MA'ARIV THAT MR. ARAFAT HAS TRANSMITTED HIS MESSAGE TO THE ISLAMIC MILITANTS BY VARIOUS CHANNELS, INCLUDING THE ARREST OF HAMAS LEADERS. THE VIOLENT DEATH LAST MONTH OF HAMAS MILITARY LEADER MUHYIDEEN AL-SHARIF SET OFF A CONFRONTATION. HAMAS BLAMED ISRAEL AND MR. ARAFAT'S PALESTINIAN AUTHORITY. THE PALESTINIAN AUTHORITY'S INVESTIGATION DETERMINED THAT MR. AL-SHARIF WAS KILLED BY RIVAL HAMAS LEADERS. THEN MR. ARAFAT ORDERED THE ARRESTS. IN THE NEWSPAPER INTERVIEW, THE ISRAELI MILITARY INTELLIGENCE CHIEF SAID MR. ARAFAT HAS ALWAYS SEEN THE MILITANT ISLAMIC HAMAS AS A THREAT TO HIS LEADERSHIP AND TO THE PEACE PROCESS WITH ISRAEL. GENERAL YA'ALON SAID MR. ARAFAT'S DECISION TO STOP HAMAS ATTACKS ON ISRAEL IS A STRATEGIC MOVE, AFTER HE DETERMINED THAT TERROR ATTACKS IN RETALIATION FOR MR. AL-SHARIF'S DEATH WOULD HARM THE PALESTINIAN CAUSE. THE ISRAELI GENERAL SAID THE DECISION TURNS THE CLOCK BACK MORE THAN ONE YEAR, WHEN PALESTINIANS PROTESTED ISRAEL'S CONSTRUCTION OF A JEWISH NEIGHBORHOOD IN THE MOSTLY ARAB SECTION OF JERUSALEM. THEN, ISRAELI PRIME MINISTER BENJAMIN NETANYAHU CHARGED THAT MR. ARAFAT GAVE THE "GREEN LIGHT" TO PALESTINIAN EXTREMISTS TO CARRY OUT TERROR ATTACKS. TURNING ON THE "RED LIGHT" HAS BEEN ISRAEL'S MAIN DEMAND OF THE PALESTINIANS EVER SINCE -- A CONDITION FOR IMPLEMENTING PEACE AGREEMENTS. U-S ENVOY DENNIS ROSS IS DUE IN ISRAEL NEXT WEEK TO RESUME HIS PEACEMAKING EFFORTS. OBSERVERS SAY THE STATEMENT BY ISRAEL'S CHIEF OF MILITARY INTELLIGENCE ACKNOWLEDGING THAT THE PALESTINIANS ARE CARRYING OUT ISRAEL'S NUMBER ONE DEMAND MAY HELP MR. ROSS BREAK THE STALEMATE IN THE PEACE PROCESS. (SIGNED) NEB/ML/JWH 16-Apr-98 8:26 AM EDT (1226 UTC) NNNN Source: Voice of America .