Canceling the deal — for an early-warning radar plane system known as Phalcon — also removes a thorn in the side of pro-Israel lobbyists in Washington.

Cancellation may now facilitate passage of a foreign aid bill that earmarks nearly $3 billion for Israel, but has come under fire in recent weeks specifically because of the Phalcon deal.

The radar deal has hampered lobbying efforts for foreign aid to Israel. American Jewish lobbyists have been forced to quash two recent attempts in Congress to withhold a $250 million slice of the foreign aid package to Israel, equal to the amount of the China sale.

Heated congressional hearings over the past few weeks may have driven drove home the point to Israeli Prime Minister Ehud Barak and his advisers that the sale was indeed damaging relations with the United States, according to a spokesman for the leading pro-Israel lobby in Washington.

"We saw an unprecedented level of criticism aimed against Israel over the sale," said Kenneth Bricker, spokesman for the American Israel Public Affairs Committee.

"Clearly, once the Israelis were alerted to the substance of the two public hearings, I think they began to realize the gravity of the situation."

But the timing of the cancellation also coincided — some say not coincidentally — with the Camp David summit. Attention is beginning to focus on the financial or military commitments the United States may have to make in any peace deal.

An unnamed U.S. official was quoted as describing the canceled deal as "a goodwill gesture on Barak's part."

The leading congressional critic of the proposed sale praised Israel's about-face

"For the sake of U.S. national security interests and, in fact, the national security interests of all our allies, such as Israel, I am glad that this matter has been resolved," said Rep. Sonny Callahan (R-Ala.), chair of the House Appropriations subcommittee on foreign operations.

Israeli leaders routinely herald their "unique relationship" with the United States.

At the same time, though, Israel boasts a burgeoning defense industry that needs new markets to keep its products innovative and profitable. Observers speculated that pressure on Barak to establish new trading partners, like China, might have been behind the deal.

The Phalcon system would have been mounted on modified Boeing 707 airplanes. The deal would have given China the option of buying three to seven more of the planes.

They also suggest Barak has been so single-minded in his pursuit of Middle East peace that he may have underestimated how much the China deal rankled some in the Clinton administration and U.S. Congress.

American officials have expressed concern that the sale would enhance China's threatening position against Taiwan and could be used to track U.S. aircraft should there be a military conflict there.

In the end, burnishing the U.S.-Israeli relationship may have outweighed pressure from Israeli defense contractors.

"Israel will not do anything to harm the United States," said Barak spokesman Gadi Baltiansky.

He added that Barak had "expressed sorrow" to Chinese President Jiang Zemin in a letter that formally announced the cancellation.