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Israel's cabinet on Wednesday may approve extending a security barrier in the West Bank but will put off deciding whether it will enclose large Jewish settlements because of U.S. opposition, political sources said.

Israel says the elaborate system of electronic fencing and concrete walls under construction is meant to keep out Palestinian suicide bombers.

Palestinians call it a "new Berlin Wall" effectively annexing occupied territory they seek for a state.

Washington fears the barrier could thwart the creation of a viable Palestinian state with contiguous terrain in the West Bank and Gaza Strip as envisaged by its four-month-old "road map" peace plan, which has been stalled by persistent bloodshed.

U.S. officials want the fence to adhere to Israel's recognized pre-1967 borders, not veer well inside the West Bank to shield settlements as Israel's ruling rightists demands.

The Israeli government has said the barrier is only a tactical security measure that does not preconfigure borders.

But U.S. suggestions that it may reduce $9 billion worth of loan guarantees to Israel if the fence is shown to be furthering settlement in occupied territory, and compounding obstacles to peacemaking, has thrown a spanner into the costly project.

Israeli political sources said U.S. dismay meant the cabinet on Wednesday would avoid committing to the most controversial segment -- jutting some 12 miles eastward inside the West Bank to gather in several major settlements.

"The cabinet will be asked to approve continued construction of the fence and that it would be built east of Ariel and Kedumim (settlements)," a senior political source said.

"However, it will leave open the issue of whether this protection of Ariel and Kedumim will mean they are within the security fence, or are separate (fenced) entities," he said.

"Overall, we will try to please our (pro-settler) political right and not upset the Americans.

FURTHER CONSULTATIONS

"When actual construction of this segment will happen will be the subject of further consultations with the Americans... that will take months. It's an issue of months."

Political sources close to Prime Minister Ariel Sharon said it was unclear whether the cabinet would hold a formal vote on this segment of the barrier but that he hoped for one.

That would placate powerful nationalists in his coalition and reassure a public that fervently wants a "Separation Fence" three years into a Palestinian uprising in which hundreds of Israelis have been killed by infiltrating suicide bombers.

Sharon has said that Ariel, the second largest among around 145 settlements with 220,000 Jews scattered through the West Bank and Gaza among 3.5 million Palestinians, would remain under Israeli control under any future peace accord.

On Tuesday, the State Department put off a decision on how much to deduct from the loan guarantees and spokesman Richard Boucher said the administration would continue talks with Israel on the issue of promoting settlements.

The first 90 miles of the barrier have been built, shielding a dozen smaller settlements near Israel's border while also separating 50,000 Palestinians from the rest of the West Bank and often their own farmland, workplaces and services.

Segments of the barrier have also begun to detach Jerusalem, whose Arab eastern sector Palestinians claim for their future capital, from adjacent West Bank territory.

But plans for the fence to slash through East Jerusalem's Palestinian-run al-Quds University were altered by Israel this week to affect only an outlying portion of campus property, senior university official Dimitri Deliani said on Tuesday.

A Defense Ministry statement confirmed a deal was reached.

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