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JERUSALEM — Things are not as bad as they look, the Israeli government insisted after an American envoy's latest round of shuttle diplomacy failed to advance the Israeli-Palestinian peace process.

It is "a dramatization" to speak of a crisis or confrontation in the U.S.-Israel relationship, the prime minister's aide, Uzi Arad, said at the conclusion of U.S. special Middle East coordinator Dennis Ross' four-day shuttle mission.

There had indeed been differences of opinion, Arad conceded, but the series of talks with Ross had been "businesslike" and the Americans understood Israel's security concerns.

A senior Israeli policy-maker, briefing reporters Monday night, sought to assure them that, despite the present impasse, Prime Minister Benjamin Netanyahu was still moving the country toward a second further redeployment in the West Bank.

Behind the facade of business as usual, however, there was some trepidation in Israeli government circles this week as to how Washington would respond to Ross returning empty-handed from what had been widely advertised as a last-ditch attempt to save the faltering peace process.

In recent days, U.S. officials have expressed the possibility that Washington may withdraw altogether from the frustrating and unsuccessful Israeli-Palestinian mediation effort.

Secretary of State Madeleine Albright delivered this apocalyptic scenario in a conference call on Friday of last week with American Jewish leaders.

And her words struck home — in banner headlines Sunday in Israel's newspapers.

No one in the Netanyahu government, not even the hardest-line ministers who advised the premier to reject Washington's proposal, can regard with equanimity the prospect of America publicly turning its back on the peace process.

A worse scenario still, from the Netanyahu government's perspective, is another response now under active consideration in the White House — a public presentation of the American formula as a formal U.S. initiative.

The U.S. plan links any new Israeli withdrawal from 13.1 percent of the West Bank to Palestinian security steps. The Israeli army pullback would tale place in stages during a 12-week period.

Unless there is a sudden change of heart in Jerusalem, presenting that proposal publicly would result in a confrontation between the Clinton administration and Israel.

Netanyahu, who has spent several weeks attempting to prevent U.S. officials from going public with their proposal, was quoted Monday as warning that such a move would result in the "explosion" of the peace process.

It would mean, moreover, that Washington is prepared to point an accusatory finger at Jerusalem as the recalcitrant party — since the Palestinian Authority has already indicated its acceptance, albeit grudgingly, of the U.S. terms while Israel continues to reject them.

Even though the reported U.S. plan has not been publicly presented, every newspaper reader in Israel — and the United States — is now intimately familiar with its terms.

During the phased redeployment mulled by the Clinton administration, the Palestinian Authority would have to prove its commitment to previous agreements: drafting a version of the Palestinian Covenant that no longer calls for the destruction of the Jewish state, tightening security controls against terror and enhancing security cooperation with Israel.

Ross is also understood to have broached the idea of U.S.-Israeli-Palestinian monitoring of the second further redeployment and also of preparations for the third further redeployment that is called for in the 1995 Interim Agreement.

Netanyahu has repeatedly called for forgoing the third further redeployment and instead moving directly into the final-status negotiations. The Palestinian side has demanded that the third redeployment be carried out as prescribed.

While Netanyahu's office was doing its best to avert the gathering storm clouds, politicians on both sides of the Knesset were busily anticipating their advent.

The Labor Party called for the Knesset, which has recessed for the Passover holiday, to reconvene for an urgent debate on the situation.

Earlier this week, Labor leader Ehud Barak had said that if Netanyahu decided to face down his Cabinet hardliners and agree to the U.S. proposal, Labor would stand by him with the votes needed to counter-balance right-wing defections in a no-confidence vote.

But with Netanyahu having apparently decided to side with his hardliners, Labor and its ideological partner, Meretz, are now warning that the government must be brought down before it leads the country to ruin.