JERUSALEM — The Likud Party has drawn first blood.

In its opening thrust of Israel's nationwide election campaign, the main opposition party this week attacked the Jerusalem issue — and it immediately had Shimon Peres' Labor-led government reeling.

"If they carry on like this, we might win yet," a senior Likud figure said.

After much Knesset bickering Peres set new elections for May 29. Meanwhile, Likud parried on the red-hot issue of keeping Jerusalem undivided, bringing a symbolic and unsuccessful measure to the Knesset this week barring any change in the city's borders.

"Peres will split Jerusalem," Likud proclaimed over the weekend on thousands of billboards and in full-page newspaper ads.

Likud leader Benjamin Netanyahu and his aides held a news conference in the capital Sunday to drive home the assault, accusing Labor of holding secret talks with the Palestinians to split Jerusalem.

The attack might have been a one-day wonder — were it not for the Peres government's reaction.

"Where do you exactly draw the line between calling someone a `traitor' and saying `[he will] divide Jerusalem?'" Peres said.

"These statements lead to [other] statements I've already heard: `Peres wants to burn Jerusalem.' This whole campaign, with the slogan of `Peres will divide Jerusalem,' is character assassination."

Labor leaders "have gone completely hysterical" responded Aryeh Deri, the leader of the ultra-religious Sephardi Shas Party.

Peres then sent Cabinet secretary Shmuel Hollander to assure reporters after Sunday's Cabinet meeting that Labor will not split Jerusalem and to deny the government was holding secret negotiations with the Palestinians about Jerusalem.

This backfired when the Israeli daily Ha'aretz confirmed in its main story Monday that two Israeli academics involved in the early negotiations with the Palestinians in 1993 in Oslo recently met several times with Palestinian figures about Jerusalem.

One of the two, Ron Pundak, was quoted as saying that the meetings were "purely academic." Unlike 1993, Pundak said, there is now no need for unofficial diplomacy because Peres and Palestinian Council President Yasser Arafat talk directly.

Compounding the impression of a governing party on the run — instead of a party with a commanding electoral lead in polls — Labor slashed wildly at Likud.

Peres, stopping short of accusing the Likud of incitement, said there are "thousands" of people who are intent on murdering government ministers amid Likud threats about Jerusalem. Labor ministers grimly recalled the hot Likud rhetoric before Yitzhak Rabin's assassination last November, which some later blamed for stirring a climate that contributed to the killing.

But this charge fell flat when Minister of Tourism Uzi Baram said the Likud's tactic was within the bounds of political propriety.

Perhaps Labor's most glaringly oversensitive response was Minister of Internal Security Moshe Shahal's announcement that he would use police force if necessary to prevent high-profile Palestinian diplomatic activity at eastern Jerusalem's Orient House.

Orient House is the headquarters of Faisal Husseini, the top Palestinian leader in Jerusalem and minister for Jerusalem affairs in the Palestinian Authority. Ostensibly, Orient House's activities are unconnected with the Palestinian government, but with the 170,000 Palestinians in eastern Jerusalem.

With that justification, Husseini and other leading Palestinians receive foreign dignitaries at Orient House. Israel protests such diplomatic activity as eroding its own claim to sovereignty over the city, but it has been unable to stop the meetings. And Peres contradicted Shahal, saying Israel could not prevent foreign ministers from visiting Orient House.

Jerusalem's Likud mayor, Ehud Olmert, derided Labor's supposed tough stance on the Orient House (though he neglected to mention that the ban began during the days of Yitzhak Shamir's Likud government, in which Olmert was a minister).

But Shahal and Labor were apparently too rattled to raise that point. Instead, Shahal swam straight into the net that Likud cast for him, making a commitment that international pressure will surely prevent him from honoring.

The Likud is likely to keep digging away at the Jerusalem issue throughout the campaign. A highly placed Likud strategist said his party also plans to attack "the Peres credibility factor."

Echoing elections in the 1980s that Peres lost, the Likud intends to reawaken a public perception that what Peres says is not what he means — or what he intends to do.

"I give Peres all the credence he gives himself," Netanyahu said sarcastically. "He denied that he was negotiating with the PLO when he was doing so — and now he denied he's negotiating over Jerusalem."

But some in Labor suggested Likud went on the offensive too early.

Labor strategists maintain Peres' "credibility problem" is long gone. They believe the new prime minister, with a worldwide reputation for statesmanship and courage, has proved himself credible and consistent, clinging to his peace policy in the face of widespread skepticism and ridicule.

Why, then, the Labor panic? Political observers point to the no-win quality of the Jerusalem issue from the Labor perspective. Polls show a national consensus for keeping Jerusalem undivided and under Israel's sole sovereignty as its capital.

Still, some 65 percent believe that a Labor government would reach some sort of compromise with the Palestinians on the city, which the Palestinians insist is their capital. Given that Labor is still ahead in the polls, there is an obvious contradiction here.

Many people are opposed in theory to concessions on Jerusalem. But in practice, they regard them as inevitable. This week, Likud drove a sword through that contradiction, with dramatic success.

Buoyed, Likud will doubtless return to the Jerusalem contradiction. But the announcement this week by former Likud member David Levy, 58, that he will form his own party, Gesher (Bridge), means the popular Sephardic leader could siphon 5 percent to 6 percent of the votes away from Likud, and help the now-shaky Labor hold onto power.