WASHINGTON — American Jewish leaders are downplaying a reduction in U.S. aid to Israel and hailing numerous provisions in this year's U.S. spending bill that place restrictions on aid to the Palestinians.

President Bush signed the fiscal year 2003 spending bill on Feb. 20, several months later than originally anticipated. Foreign aid was cut by 0.65 percent across the board, including the $2.1 billion in military aid and $600 in economic aid proposed for the Jewish state.

Left out of the spending bill entirely was an extra $200 million for Israel to cover the cost of fighting terrorism, and $50 million in humanitarian aid for Palestinians in the West Bank and Gaza Strip, delivered through the U.S. Agency for International Development.

But the spending package includes several initiatives that will control how aid is disbursed in the Middle East. Jewish leaders are praising these measures as attempts by Congress to align itself with Israel and combat corruption and support for terrorism among Arab governments.

The first provision mandates that no federal assistance should go to a future Palestinian state until the current Palestinian leadership is replaced, that the state has demonstrated "a firm commitment to a peaceful coexistence with the state of Israel" and it has taken measures to combat terrorism.

The provision also calls on a Palestinian state to show it is working toward Middle East peace before it receives government assistance. But the provision includes a national security waiver and an exemption for funds that would help the Palestinian Authority implement reforms.

A second provision calls for Congress' General Accounting Office to investigate whether U.S. contributions to the U.N. Relief and Works Agency, which helps Palestinian refugees from Israel's 1948 War of Independence and their descendants, are being used to promote terrorism.

"The United States has a right to know whether the $110 million per year we send to UNRWA is being spent in a way that is consistent with our laws," said Rep. Joe Knollenberg (R-Mich.), who introduced the language. "Only an independent investigation by the GAO will settle the question of whether taxpayer dollars are funding terrorist activities."

Israel says UNRWA allows terrorism to flourish in Palestinian refugee camps. In fact, Israeli officials say, one-third of the Palestinian suicide bombers who have struck during the current conflict have come from the Jenin refugee camp, which is serviced by

UNRWA.

Congress also passed a provision that would investigate how USAID distributes funds in the West Bank and Gaza Strip, amid concerns that it is hiring contractors affiliated with the Palestinian Authority.

Also included in the bill is language that allows U.S. citizens born in Jerusalem to have Israel listed as their country of birth on birth certificates, passports and other federal documents. Until now, Jerusalem has been listed without a country, to appease Palestinians who contest Israel's control of the city.

Overall, Jewish leaders were pleased with the spending bill, despite the cut in aid.

"This bill contained landmark language codifying President Bush's conditions for Palestinian statehood and required a review of United Nations complicity in Palestinian terrorism," said Amy Friedkin, president of the American Israel Public Affairs Committee. "Clearly, America's goals in the region do not include the creation of a state that could be designated a state sponsor of terror. This legislation breaks new ground by codifying the president's vision, demonstrating that the United States speaks with one voice."

Left out of the bill was $200 million in additional aid to Israel that originally was promised by President Clinton to help cover costs associated with Israel's withdrawal from southern Lebanon in May 2000.

Officials say the $200 million was not worth fighting for, since Israel is requesting $4 billion in military aid and $8 billion in loan guarantees in a supplementary aid package expected to reach Congress later this year.

"The reality is, when you have a much bigger package coming around the corner, you have to make decisions," a senior Jewish official said. "This was a real easy business decision.''