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P RESIDENT BUSH was right when he suspended the 18-month U.S. discussions with the Palestine Liberation Organization this week in the wake of last month's terrorist attack on the Israeli coast, foiled by the Israeli military.

That attack, if successful, would have exemplified everything that is worst in the random violence of terrorism. Boats with machine gunners were speeding toward a crowded beach full of swimmers and sunbathers near Tel Aviv when they were headed off by the Israelis.

The terrorists' alleged motive -- retaliation for a massacre of Palestinians by a deranged Israeli citizen -- deserves no sympathy.

Bush had demanded that the PLO condemn the attack -- something it absolutely should do -- and discipline those responsible for it -- something it should do if it can. The organization will not be a credible partner at any peace table if it can't separate itself fully and firmly from the unacceptable tactics of terrorists.

Bush's action makes clear that the United States has not changed and will not change its total opposition to terrorism.

But the decision, as Bush put it, was "not an easy call," since the suspension is likely to have negative effects on the peace process in the immediate future. Ironically, Bush's action pleased both Palestinian and Israeli extremists, since neither want peace negotiations.

It was a setback for Yasser Arafat, the PLO chairman, who seeks negotiations.

Bush is convinced that Arafat did not order the raid and said talks with his more moderate PLO faction could be quickly re
sumed once he condemned the terrorist raid.

But the fragility of the peace process is evident in the very fact that terrorist factions remain a powerful and even rising force within the PLO. The PLO is composed of eight groups, one of which is the small unit responsible for the terrorist raid.

Arafat has so far gained little, as most Palestinians see it, by his moderate approach. He is now in a weak position to control Palestinian militants.

The U.S. diplomatic link with the PLO was a hopeful development, since it brought more balance into the U.S. role as a mediator between Israelis and Arabs. The U.S. also supported the principle of trading land for permanent peace -- an essential part of any settlement.

But the U.S. diplomatic approach has been undercut and stalled by the present Israeli government, which, far from giving up any Arab land, is pressing a policy of encouraging Jewish settlements on it. It also views the PLO as "a major obstacle to peace" and tolerates no ties with it, even though the PLO is the only Palestinian group with enough influence to be worth talking to.

Now the beach raid has undermined the situation still further.

The failures of diplomacy over the past two years appear to have brought increasing militancy on both sides. Moderates are having a difficult time.

Arafat is still at least talking about a negotiated peace. The hard-line Israeli government must start doing so, too.

But an end to terrorism remains a basic ground rule.

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