The turmoil following the massacre of Palestinians in Hebron threatens to cool off the red-hot Israeli economy as well as put off promising Arab-Israeli business deals. The economy grew at 12% for the second half of 1993 and was expected to tack on another 6% to 7% this year. But it could be set back sharply. The most vulnerable sectors are tourism, which has seen record volumes in the past two years, and construction, which grinds to a halt when, as now, Israel closes its borders to Arab laborers from the territories.

Among the Israeli-Arab ventures that could be hurt is the International Palestinian Bank, a partnership between Israel's Bank Leumi, Morocco's Banque Commerciale du Maroc, Spain's Banco Central Hispano, and a group of Palestinian investors. Bank Leumi was getting set to hand over its two West Bank branches to the new entity. But now, Leumi Chairman Moshe Sanbar fears it is on "the back burner."

Economic forces could bring the two sides back to the bargaining table. The Palestinians cannot afford to have their workers shut out of Israel for long. And the Israelis know that a souring of the peace process will likely mean an end to the foreign-investor interest that has boosted their economy and financial markets.

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