updated 7/17/2006 1:39:10 PM ET 2006-07-17T17:39:10

Guests: Fouad Siniora, Rafael Frankel, Scott Wilson, Richard Wolffe

CHRIS MATTHEWS, MSNBC ANCHOR:  Five days ago, two captured soldiers; tonight, a possible all-out regional war.  As the world watches with worry, what can George Bush do about it? 

Let‘s play HARDBALL.

Good evening, I‘m Chris Matthews with a Special Edition of HARDBALL. 

Tonight, the Middle East faces a daunting prospect of an all-out regional war.  What began five days ago with the capture of two Israeli soldiers has now escalated into wide-ranging bloodshed.  In its deadliest attack on Israel yet, Hezbollah today fired at least 20 rockets at the Israeli city of Haifa, killing 10 people.  Hezbollah also launched its deepest attacks into Israel since the fighting began, hitting the town of Afula and another town near Nazareth. 

In a taped television address, Hezbollah chief Sheikh Hassan Nasrallah declared that Hezbollah was just at the beginning.  He said—quote - “The enemy doesn‘t know our capabilities or what we have.”

Meanwhile, Israeli warplanes today attacked the southern port of Tyre in Lebanon, killing 10 civilians.  Israel also re-ignited its bombing campaign on the Beirut‘s airport and struck this port city of Tripoli.  In all, over 150 people have been killed in Lebanon so far in this fighting—almost all of them civilians. 

The mounting violence comes as top leaders from around the world meet in St. Petersburg, Russia, for the G8 summit.  The leaders agreed today for a call for a cease-fire, but still disagree on whether Israel‘s response was appropriate. 

Amid the violence, big questions remain.  Will Iran and Syria get into the fight?  And if the fighting spreads, what will President George Bush do about it? 

Tonight, we take you direct to the Middle East for the latest in what is happening, beginning with Beirut, and NBC‘s Richard Engel, who is standing by live. 

Richard, tell us about the bombing going on right now. 

RICHARD ENGEL, NBC CORRESPONDENT:  Good evening, Chris.

Those Israeli—Chris, the Israeli air strikes are continuing tonight in the Lebanese cities of Baalbek and Tripoli. Today, we sat down with Lebanon‘s prime minister.  He said that in the last five days, Israel has set his country back 50 years.

(BEGIN VIDEOTAPE)

What can be done, sir, to get out of this situation? 

FOUAD SINIORA, LEBANESE PRIME MINISTER:  An immediate cease-fire.  A comprehensive cease-fire, this is the way how we can proceed forward, because with the continuation of destruction—bombardment, killing, injuries, and destruction of all the infrastructure—this is not an environment in which you can talk.  I think, the best way and the only way is to work for an immediate and comprehensive cease-fire. 

ENGEL:  Who can do that? 

SINIORA:  Well, actually, there are quite a number of groups who are trying to really play the work of or the role of the honest broker.  We are going to see, in a little while, the delegation of the United Nations sent by the secretary-general.  And we will be receiving, as well, Mr. Solana (ph).  So we will have an honest and good discussion. 

But the point is that we want to have a cease-fire.  Israel is insisting that it doesn‘t want to have any cease-fire.  And it would want to continue its bombardment of the country.  For the past five days, the country has been under fire.  The doors of Hell has been opened against Lebanon. 

ENGEL:  Will you send your army to the south? 

SINIORA:  This is the thing that, as I said very clearly, that we want to reinstate the role and the presence of the Lebanese state in all Lebanon. 

ENGEL:  Is your government powerful enough to do that? 

SINIORA:  That, I mean, this is something that we have to be empowered to do that.  And if we want to continue, that Lebanon is under continuous fire—I don‘t think that the Lebanese government is going to be empowered.  This is not the way to empower the Lebanese government.  The way, how to do that, is to start by having a cease-fire, and then the Lebanese government will step in, in order to deal with the abducted soldiers.  And then, this is the second step would be to go ahead under the auspices of the United Nations, so that the Lebanese government can reinstate its presence as the only authority in the sovereign Lebanon. 

ENGEL:  Some would say, if you could go in now, if there was cease-fire, why didn‘t your government go in to take, to exert its authority before? 

SINIORA:  The point is that Israel has not been responding.  Israel is breaking Lebanon.  It is cutting it into pieces.  There isn‘t one single bridge that hasn‘t been destroyed.  It has destroyed, so far, more than 50 bridges in the country.  It has destroyed the runways in Beirut, they have, and in other airports.  It has really destroyed so many of the telecommunication centers. 

So why it‘s doing that?  It wants bring back Lebanon 50 years backward.  This is—do you think that this can bring stability?  This is the thing that can bring peace?  If Israel really wants peace, this is not the way, definitely.  This is going to really create a feeling, a feeling among so many people, a feeling of reprisal for the action.  We don‘t want really to have anything of the sort.  We want to really have moderates. We want to have reason to prevail.  So let‘s try to move ahead, one step after the other.  A cease-fire, then reason will step in. 

ENGEL:  So do you think that Hezbollah‘s actions—taking those soldiers, starting, sparking this crisis - were justified? 

SINIORA:  I don‘t really.  I‘ve expressed our view very clearly that such an action, we were not consulted with.  And we take no responsibility, and we disavow such an action. 

But, nevertheless, I‘m trying to paint this picture to see what led to this problem.  That is the case.  Let‘s try to sort things and resolve issues.  I am for resolution.  And this is the way how it can lead to resolution. 

ENGEL:  Sounds like your government is stuck in the middle between Hezbollah on the one side and Israel on the other.  Do you feel pressured, squeezed in the middle? 

SINIORA:  Well, I mean definitely, such an action, as I said, we were not consulted.  We found ourselves in it, and we have to deal with it.  But at the same time, we are representing the people, and we represent the people who are suffering, so we have to deal with this situation.  We do not deny the fact that these people who have been, or should have been released a long time ago, have been released. 

ENGEL:  Do you agree with Hezbollah on that? 

SINIORA:  I want to really make my position very clear, is that I said from the very beginning, that the government was never consulted, or we didn‘t know about this action.  I mean, this - and we are disavowing this... 

ENGEL:  Are you looking for these prisoners?  Have you asked Hezbollah to give them back?  Do you have any idea where they might be held? 

SINIORA:  You see, Hezbollah...

ENGEL:  Are your security agencies looking for them, the intelligence operations? 

SINIORA:  Hezbollah, actually what they are saying, that they are in good condition, and they are being held by Hezbollah.  Now, this is the situation as it stands.  See, Israel has been acting in one way or another, like—I mean, if Hezbollah has abducted soldiers, Israel has been detaining these people, in spite of their will and for no reason, like the thing it has done in Gaza.  They already took in custody scores of parliamentarians, scores of ministers, and thousands of people. 

ENGEL:  What is happening to this city, this country right now? 

SINIORA:  Well, I can really say that what has been done by Israel in a matter of five days took Beirut and the whole country 50 years backwards.  I know that the will and the determination of the Lebanese and every Lebanese is that nothing is insurmountable.  But, nevertheless, what they have done is a major crime against humanity, against civilization.  We have a barbaric war machine that is really created—that‘s killing people, that is destructing an infrastructure, that is causing harm and terror. 

This is the real terror that‘s being exercised by Israel.  They speak about terror?  This is the thing that they are doing.  Look:  Today they committed a massacre in Tyre, in south Lebanon.  Yesterday in Marwahine (ph); the day before in Biyarda (ph).  And they are killing innocent people.  These are the massacres.  This is a repetition of what they have done in Ghana six, eight years ago. 

They talk about terror?  They talk about terror, but they act.  They do terror every day. Nevertheless, we still want peace. 

(END VIDEOTAPE)

ENGEL:  Chris, the impression I walked - Chris, the impression I had walking away from that interview was that the prime minister really is not in a position, or is not willing, to tell Hezbollah what to do.  He is simply trying to act as a mediator, trying to bring the international community, get them involved, give himself some cover, and try and get out of this situation - Chris. 

MATTHEWS:  What is the reaction on the street to the Israeli bombing. 

And I understand, it is still going on right now? 

ENGEL:  The reaction has been like everything in this country, very divided.  There are certain  members of the Christian community who would very much like to see Hezbollah go.  There were people on this hilltop actually today where I am standing, overlooking south Beirut - that is a predominantly Shiite area—some of those people were clapping.  At one stage, there were some clashes between Hezbollah supporters and members of this Christian community. 

So the reaction here, like everything, has been divisive, and, at times, it could turn violent.  That is the fear, that if the government of Lebanon took strong action against Lebanon, if they sent soldiers into the south—and there was no coordination or no permission taken from Hezbollah—then you could even provoke a civil war here again. 

MATTHEWS:  You asked the question of the prime minister of Lebanon—let me go further:  Does the prime minister or his government have the power - the military and political power—to pull the Hezbollah groups back from the Israeli border, as the Israelis would like is to see done? 

ENGEL:  No.  He said that himself several times.  He said - quote - “I need to be empowered.”  What he - his plan, as far as I understood it, is like this:  He wants an immediate cease-fire.  Stop the missiles; stop the shelling.  Then the U.N. should come in.  There should be negotiations for Israel and Hezbollah to do a prisoner swap; then, with U.N. support, Lebanese troops, official troops, will be deployed to the border.  That‘s his vision for how to get out of this situation—Chris. 

MATTHEWS:  Is he really believing or claiming to believe this is all about two Israeli soldiers and the return of detainees in Israel?  It looks to me from here in Washington, from this country, that there is larger ambitions on both sides in this skirmish. 

ENGEL:  That is—absolutely.  And the prime minister said that repeatedly, that this is a much larger issue, that these two soldiers were really just a trigger, and that the best solution is to try and look at the root causes.  What caused Hezbollah—and the Lebanese government certainly has some blame here that they allowed this group to become so powerful.  But, according to the government here, Israel also has some of the blame because of their actions that caused this extremism to grow on this side of the border. 

MATTHEWS:  OK, thank you very much - NBC‘s Richard Engel in Beirut, Lebanon.

We go now to Haifa in Israel to the scene of Hezbollah‘s attacks in northern Israel today.  Martin Fletcher joins us now. 

Give us an update on the bombing in northern Israel, Martin.

MARTIN FLETCHER, NBC CORRESPONDENT:  Well, Chris, the situation right now is it‘s quiet, but there have been Katyushas falling behind me every so often.  And the real issue here now is that, of course, it had to happen.  Earlier today, a rocket killed here eight Israelis today.  People were shocked, and they were even more shocked that it happened here in Haifa, 20 miles from Lebanon.  That scarred them even more.

(BEGIN VIDEOTAPE)

(voice-over):  It was 9:10 in the morning.  The siren wailed.  But before workers of this Haifa train depot could reach cover, a tremendous roar.  Then, a smashing sound as the rockets crashed into the roof and tore straight through—no time to run or hide. 

It was the greatest loss of life in any attack in Israel since the fighting began five days ago, but the army promised it would have no effect on its campaign against Hezbollah. 

MIRI EISEN, ISRAELI GOVERNMENT SPOKESPERSON:  Israeli will not tolerate, and we will not stop until Hezbollah is disarmed, until Hezbollah has ended on our northern border and is not the one defining the rules of the game here. 

FLETCHER:  It was another nervous day in Israel, with a million people now within rocket range of Hezbollah.  Dozens of rockets fell during the day, including nine more in and around Haifa. 

While we were at the train depot, another siren. 

(on camera):  There‘s panic here.  There is panic here right now. 

UNIDENTIFIED MALE:  Hezbollah!  Hezbollah!

FLETCHER:  There‘s Katyusha rockets falling right now, here in the port.  The sirens are going.  People are running away. 

(voice-over):  Two more rockets landed; little damage. 

But the beautiful Haifa Bay area nearby is a disaster waiting to happen.  Fuel storage tanks, Petra chemical industries, oil refineries, and half a million people living there - sitting ducks for Hezbollah gunners only 20 miles away and armed with accurate Iranian rockets, putting them all within easy rocket range. 

The army continued to pound south Lebanon with artillery and also issued a warning to residents there. 

UNIDENTIFIED MALE:  We will convince them to leave their villages and homes and go to the north of the country. 

FLETCHER:  One of the army‘s goals is to destroy the long-range rockets, but they admit, Hezbollah still has plenty left. 

(END VIDEOTAPE)

Israel says, Hezbollah also has rockets with a range of 100 miles.  Now, that would put Israel‘s biggest town, Tel Aviv, at risk.  And today, the army did warn Tel Aviv residents to be on alert - Chris. 

MATTHEWS:  Let me ask you, is this about the two Israeli soldiers taken by Hezbollah, or will Israel not stop until it has destroyed Hezbollah? 

FLETCHER:  Well, you know, obviously, as Richard pointed out, the kidnapping of the two soldiers, that was just a trigger.  This was a war waiting to happen, ever since Israel pulled out of south Lebanon in the year 2000 Gaza and expected and agreed with the Lebanese government that they would police the border.  That didn‘t happen.  Hezbollah moved in.  So for the last five years or so, Israel knew they would have eventually to move in and force Hezbollah out. 

They have been planning this operation for five years, improving it, perfecting it.  And everything they are doing now, Chris, all the attacks in Lebanon are following very specific what the Israelis call a work plan.   They know exactly what they need to do, and they‘ve known this now for years.  So they are just putting into action a plan they‘ve been working on for five years.  Kidnapping of the soldiers, unfortunate.  They want the soldiers back, but it is really just an excuse to do what they think they need to do—Chris. 

MATTHEWS:  Great report.  Thank you very much - NBC‘s Martin Fletcher in Haifa in northern Israel. 

Coming up, do Israelis support their government‘s push for an all out and difficult war to destroy Hezbollah.  We‘ll get direct to Jerusalem for you to hear what it‘s like on the streets there. 

You‘re watching a HARDBALL Special Report, only on MSNBC. 

(COMMERCIAL BREAK)

MATTHEWS:  Welcome back to this HARDBALL Special Report.  Israeli officials say, at least eight people were killed today by Hezbollah rockets that hit in Haifa.  Another Hezbollah rocket attack near Nazareth in Afula was the deepest attack inside Israel so far, but no causalities are reported yet from that attack. 

Kevin Peraino is in Jerusalem - he is Jerusalem bureau chief for “Newsweek” magazine.  He joins us now by phone. 

Kevin, give us your assessment overall of the attacks back and forth between Israel and Hezbollah. 

KEVIN PERAINO, “NEWSWEEK” CORRESPONDENT:  Well, the biggest thing today is this attack in Haifa.  It has raised concerns in Jerusalem that the conflict could widen.  Now, Israeli officials who we have talked to have largely said that they don‘t expect Syria to be involved in this.  So far, they said they think it would take some kind of significant provocation to get—to extend these reprisals to Syria. 

But this attack on Haifa today that killed eight Israelis has raised concerns about that.  Shaul Mofaz was in Haifa today and was talking about Syrian technology involved in the rocket that struck Haifa.  And so that‘s something that has people worried here, that this conflict could extend there in the next coming days.  Now that said, as I say, Israeli officials privately, pretty cautious saying that they think it would take some kind of serious provocation on the part of the Shaul Mofaz for that to happen—they don‘t really expect it. 

MATTHEWS:  Kevin, give me a sense of the politics behind this.  We have an interesting coalition.  We have got a defense minister who is a labor party leader - in fact, he is the leader.  How does this work?  Do both parties want to be very aggressive?  Is there unanimity on this? 

PERAINO:  There is right now, and that‘s one thing that wasn‘t the case five days ago when this began.  When the soldier was kidnapped in Gaza, Olmert retaliated pretty forcefully down there, and that wasn‘t particularly popular.  He didn‘t have a lot of support for it.  Particularity, he had rounded up a lot of Hamas legislatures, but there was sort of no end in sight to this Gaza bombardment. 

Since the attacks on—from the kidnappings from Hezbollah in the north—the Israeli public has largely rallied around Olmert.  It seems like a much more clear cut case to a lot of people in the Israeli public.  And so that sort of bolstered Olmert‘s standing here.  And it has united both the Labor Party, Kadima, and other parties here. 

MATTHEWS:  Is the Israeli government in a go-it-alone status now?  Are they waiting - ignoring, I should say, any word that comes from St.  Petersburg? 

PERAINO:  Yes, well, Israeli officials said that they are sort of getting mixed messages.  They say, you know, they are hearing from - they are getting some messages from the USA, You know, have to tone this down a little bit, minimize civilian causalities.  They are getting other messages that say, You know, we know you have to do what you have to do.  So Israeli officials told me they are waiting, like everybody else, to see who is going to take the lead.  One I talked to said they feel like some kind of third party is going to be necessary to resolve the crisis on the northern border.  But, frankly, they say they don‘t know who it‘s going to be.  You know, they said they don‘t see the U.S. stepping in right away.  They feel like the U.N. is not strong enough to step in and end it right away.  So, frankly, they are wondering just like everybody else is, who is going be able to step in and help resolve the crisis.

MATTHEWS:  That is the big question.  Thank you very much - Kevin Peraino who is with “Newsweek” in Jerusalem. 

Up next, we will take you inside the terrorist group Hezbollah, itself.  How did a guerrilla operation become such a powerful force in the Mideast? 

You are watching a HARDBALL Special Report, only on MSNBC.

(COMMERCIAL BREAK)

MATTHEWS:  Welcome back to our HARDBALL Special Report on the Middle East crisis.  For many years, the terrorist group Hezbollah has wielded extraordinary power and influence in the Middle East. 

NBC‘s Mike Taibbi has this report.

(BEGIN VIDEOTAPE)

MIKE TAIBBI, NBC CORRESPONDENT (voice-over):  Today, a new statement from Hezbollah leader, Sheikh Hassan Nasrallah, after his rockets had struck Haifa, the southernmost penetration into Israel yet. 

“We will continue,” he said.  “We still have a lot more, and we are just at the beginning.”

But is that true or just rhetoric? 

RAGHIDA DERGHAM, MSNBC NEWS ANALYST:  I think Shaul Mofaz (ph) means to go the distance with this war.  I don‘t think this time he‘s backing down. 

TAIBBI:  But why now?  For years, Hezbollah‘s ubiquitous yellow flags in southern Lebanon has stood for schools, clinics, and other assistance programs, and not for the Iranian-backed Party of God formed after the Israeli invasion of 1982 that was blamed for a decade‘s worth of terror attacks:  The bombing of the American ambassador in Beirut, 1983: 63 dead; the U.S. Marine barracks in Beirut later that year: 241 dead; dozens of kidnap victims, including American journalist Terry Anderson; and the highjack of TWA Flight 847 in Athens. 

One answer to the why-now question:

CONDOLEEZZA RICE, SECRETARY OF STATE:  They are trying to destabilize the young government of Lebanon by, in the case of Hezbollah, using Lebanon‘s territory to attack Israel without the knowledge of the Lebanese government. 

TAIBBI (on camera):  But many analysts say Hezbollah has made a huge miscalculation, not only about Israel‘s response, but also about the impact on its own popularity and political power within Lebanon. 

(voice-over):  For example, Hezbollah now holds some two dozen seats in Lebanon‘s parliament, a move toward legitimacy and inclusion every bit as striking as the Hamas success in the Palestinian territories. 

LT. COL. RICK FRANCONA (RETIRED), MSNBC MILITARY ANALYST:  And now, they‘ve exploited all that political capital for an operation that they know they can‘t win. 

TAIBBI:  Again, why?  And more and more, the suggested answer that Hezbollah won‘t stop until its military and financial sponsor, Iran, tells it to stop. 

DERGHAM:  It has to decide if it is for Lebanon or it is going to be a proxy warrior for Iran. 

TAIBBI:  In past conflicts between Israel and Hezbollah, negotiated prisoner exchanges have led to a cease-fire.  This time, no one on either side is conceding that is a possibility—yet. 

Mike Taibbi, NBC News, New York.

(END VIDEOTAPE)

MATTHEWS:  Thanks you—Mike Taibbi.

Up next, in the other half of its two-front war, Israel stepped up attacks today throughout Gaza.  As violence rages on, are Israel‘s enemies uniting against their common foe?

You are watching HARDBALL on MSNBC.  

(COMMERCIAL BREAK)

MATTHEWS:  Welcome back to HARDBALL.  The Israeli army is now fighting on two fronts, fighting Hezbollah on the northern border and battling Hamas in the Gaza Strip. 

NBC‘s Fred Francis is following all of today‘s developments from the Gaza Strip. 

(BEGIN VIDEOTAPE)

FRED FRANCIS, NBC NEWS CORRESPONDENT:  Fierce fighting in Gaza for the first time in five days.  Twenty-four hours ago, 10 Israeli tanks moved into the northern Gaza area.  They had pulled back a week ago.

They moved back in to fight some Palestinian militants.  Tanks supported by helicopters and even some jets dropping bombs, and then all day today, the pump of artillery fire about six miles away, not in the heavily-populated areas, almost as a reminder to the Hamas government that the Palestinians here. 

But the fighting in the north with Hezbollah and the fighting in Lebanon has not distracted the Israeli military that the objective here, the objective here in Gaza is for three weeks now, three weeks to the day, to get back that Israeli soldier kidnapped and to get the Hamas government to crack down on those who are firing missiles into Israel. 

So fighting today, but basically a stalemate for the past five days. 

One of the reasons, perhaps, is the entire Hamas government, a third of them have been arrested, captured.  A third are in hiding, and a third basically have nothing to do.  For five months since Hamas was elected here, the Israelis have clamped down economically and politically.  So it‘s been very difficult.  Life has been very difficult here, and this first front, which continues today, makes it even more difficult. 

This is Fred Francis, NBC News in Gaza City.

(END VIDEOTAPE)

MATTHEWS:  Thank you, Fred Francis in Gaza City. 

Joining me now on the phone is Rafael Frankel.  He‘s the reporter for the “Christian Science Monitor”.  He‘s stationed in Jerusalem. 

Rafael, it seems like Israel wants to clean up Hezbollah, wipe it off the map.  It seems like Hezbollah says it‘s got 10,000 rockets to defend itself.  Is this the end game between these two sides?

RAFAEL FRANKEL, “CHRISTIAN SCIENCE MONITOR”:  I don‘t think you‘re going to see it be the end game.  I think both sides eventually will—I think there‘s a realization here in Israel for military officials that I‘ve talked to that it‘s pretty much impossible to destroy Hezbollah as a group.  They have too far of a broad support from the Shiite population in Lebanon and also militarily from Syria and Iran. 

So I do think that, when all is said and done here, you know, obviously Israel will continue and Hezbollah will, as well, in some form or another. 

MATTHEWS:  Does Hezbollah have the potential to hit Israel in its center, in Tel Aviv, in Jerusalem?

FRANKEL:  Hezbollah certainly claims that it does, and Israel military intelligence believes them.  They‘ve claimed so far that they can go as far as 70 miles south of the Lebanese border.  That would put them pretty close to Tel Aviv.

And you know, the rocket they fired today wasn‘t a Katyusha.  It was a high potency.  It was 200 pounds of explosives.  It was a missile that was made either in Syria or Iran.  Reports are kind of iffy on whether—which one of the countries.

And the Israeli military intelligence says that they have a number of those left, and Hezbollah says the only thing that‘s stopped them now from firing them is its own decision to do.  But that they may choose to do so in the very near future. 

MATTHEWS:  Talk to us about the people backing up both sides.  First of all, Iran.  Is Iran in a situation where it tells Hezbollah, “Go ahead, do what you feel like.  We‘ll see how it works out”?  And is that same—is that the same policy the United States is taking towards Jerusalem, towards Israel?

FRANKEL:  Hezbollah doesn‘t really do anything big.  In other words, this move to kill the Israeli soldiers and capture the other two.  It didn‘t do that without the tacit support and the nod from both Tehran and probably Damascus, as well. 

Whether Iran actually directs it to move at some point, you know, that‘s a question that I‘m not really qualified to answer, I think.  But we don‘t really understand fully the total extent of the relationship between the two.  But definitely Hezbollah does have, you know—its broad power does come from those powers in Damascus and Tehran. 

As far as Israel, you know, it doesn‘t tend to make major moves without, also, again, the tacit approval of Washington.  But we did see in the operation in 2002 called Defensive Shield, when Israel went back into the West Bank in Gaza after the series of suicide bombings, there was the calls from President Bush to stop for many days before prime minister—then Prime Minister Ariel Sharon decided that the operation was over. 

So in some sense Israel does act independently when it feels like its national security really is at stake. 

MATTHEWS:  What about Syria?  Is there a possibility of a third front?

FRANKEL:  At the moment, the politicians and the army in Israel are all saying that they have no intention of attacking Syria, and Syria, for its part, has said that any attack on its soil will be met with a very hash response towards Israel. 

And I think the feeling is, though, that the Israelis are well aware, obviously, of the support that Hezbollah gets from Syria with what‘s going on in Gaza and now, with Lebanon in the north with Hezbollah, opening up a third front, probably is not where they want to take the fight right now. 

MATTHEWS:  What needs to happen, when you put it all together from your reporting, for a cease-fire to occur on the northern border?

FRANKEL:  What the Israeli prime minister, Ehud Olmert, has said so far is two things, that he delivered a message via the Italians (ph) today Hezbollah and to the Lebanese in order for a cease-fire to happen.  There are two main conditions: one, the return of the two kidnapped Israeli soldiers; and two, Hezbollah must move back a significant distance from the Southern Lebanese border, the Northern Israeli border so that it does not have the capability to strike Israel with the impunity that it has been for the last five days with its rockets. 

MATTHEWS:  OK, thank you very much, Rafael Frankel, on the phone from Jerusalem.

Up next, what does all this violence mean for the U.S., for us?  We‘ll ask Colonel Rick Francona. 

This is a HARDBALL special report, only on MSNBC. 

(COMMERCIAL BREAK)

MATTHEWS:  Welcome back to this special edition of HARDBALL. 

Now we go to Haifa in Northern Israel, where eight people were killed today in a Hezbollah rocket attack.  “Washington Post” foreign correspondent Scott Wilson joins us on the phone. 

Scott, thank you for joining us.  I‘ve been to Haifa.  It‘s always seemed part of the very center of Israel, very developed, very modern, almost western in its character and development.  Is this a shock to be hit directly from Hezbollah?

SCOTT WILSON, “WASHINGTON POST”:  it is.  This is a place that has not been hit with Palestinian—excuse me, with missiles from Lebanon before.  It was hit by some SCUD missiles back in the first Gulf War, but as you said, Chris, this is a place where intel has a major—major headquarters here.  There‘s a lot of high-tech.  The Israeli version of MIT is here.

And so having a rocket come down in the middle of the city today, and a big rocket, carrying a 90-pound warhead, was really something that effectively shut the city down for the entire day. 

MATTHEWS:  What about the people in Israel, the kind of people here in the United States, who read the papers and keep up with events on television, on cable and the broadcast, what do the smart Israelis think this is heading to?

WILSON:  There‘s a very good question.  There‘s increasing concern among—among smart Israelis, as you describe them, about what the exit strategy is here.  It does seem to be ratcheting up each day, and I think what—how most people see it playing out as some sort of international mediation taking place at some point, cease-fire and some talks.

But the Israeli government, of course, is going to make sure that it pushes this until it really feels that its northern border is permanently secure, and that means really taking on Hezbollah down in the south of Lebanon. 

MATTHEWS:  But Israel‘s always been able to move pretty aggressively and then have us blow the whistle as the major power broker.  Maybe this is my only—my own assessment, but it seems like the United States is a reliable friend of Israel, but it‘s lost its power as an honest broker in that region. 

WILSON:  That‘s a very good point.  The United States has very little credibility in the Arab countries around Israel and in Jordan and Egypt, for example, Arab countries with diplomatic ties to Israel are in a very difficult situation now.  And the United States is not able, really, to persuade those kinds of governments that—that they need to rally around Israel or that they need to—that they need to apply more pressure in Lebanon and with Hezbollah directly at this time. 

MATTHEWS:  What are Israelis afraid of, the ones who follow events, as I said?  Are they afraid of a strategic move by Iran over the next 20 or 50 years to gradually outgrow them economically, militarily and use their terrorist group, Hezbollah, to do their dirty work in the meantime?  Is that what they‘re afraid of strategically?

WILSON:  Yes, absolutely.  This is a huge threat that Israelis

perceive and, of course, the Israeli military perceives, and to some degree

Hezbollah has shown its cards here.  And with the Iranian sponsorship

behind it, and given Israel an opportunity to go ahead and say on the world

stage, really focus its diplomatic attention right now on Iran as a major

destabilizing factor in this region.  And also Syria, which helps Hezbollah

logistically, 

But Iran really is seen as the existential threat to Israel, as Prime Minister Ehud Olmert describes it, in the years ahead. 

MATTHEWS:  Let‘s talk about the fringes of Israeli politics.  Usually you have Netanyahu on the right and Peace Now on the left.  Are they making any noise against Olmert?

WILSON:  Well, Netanyahu has been very supportive, in fact, has really rallied around the government, pledged his support, says the prime minister is doing the right things.  He‘s talked quite a bit about deterrence and Israel, what he sees as Israel‘s loss of deterrence in withdrawing from Gaza unilaterally last year, and he sees this sort of aggressive response as a way of rebuilding that to some degree.  So he‘s been quite supportive.

The peace camp that you described has been very quiet, as well.  It was a very kind of small, 800, maybe 1,000 people gathered in Tel Aviv today to demand an end to the bombing in Lebanon and talk immediately, to come to some kind of a cease-fire agreement.  But you‘re not hearing much of that at all right now, even on the talk radio—left-wing talk radio shows.  It‘s all pretty much focused on the fight at hand. 

MATTHEWS:  Fabulous report.  Thank you very much.  Scott Wilson of the “Washington Post” up in Haifa, the northern city in Israel. 

Today rockets fired from Lebanon fell deeper inside Israel, as we said, than they ever did before.  How high does this ratchet up the conflict?  I‘m joined right now by MSNBC‘s military analyst, Lieutenant Colonel Rick Francona. 

Colonel, what has changed here from previous conflicts?

LT. COL. RICK FRANCONA (RET.), MSNBC MILITARY ANALYST:  Well, as you said, the penetration, 33 miles into Israel from that Southern Lebanese border.  We‘ve never seen anything like this before.  We‘ve never seen Haifa hit by rockets from Lebanon, as well. 

But the strike on Afula and Nazareth really, I think, got everybody‘s attention, because that exceeds the listed range of the Fajr-3, which is the rocket they‘ve been using in Northern Israel to hit Haifa.  So we believe they may even have a Fajr-5, which ratchets up, like, a 45-mile range rocket.  That‘s a significant capability not seen before. 

MATTHEWS:  Well, the danger there, of course, is not just range but the density of the population when you hit your target, right?

FRANCONA:  Well, not only that.  I mean, when you fire Haifa, you know you‘re going to hit something.  When you fire at these other towns, you‘re not quite sure what you‘re going to hit. 

But what this has done is it has really increased the number of Israeli citizens that didn‘t have to worry about missile strikes or rocket strikes from Southern Lebanon.  Now you‘ve got hundreds of thousands of Israelis at risk. 

MATTHEWS:  Is that why there‘s greater sensitivity from Israel to the threat from Hezbollah than from Hamas?

FRANCONA:  I think so.  You know, they have always considered Hezbollah to be more of a threat than Hamas.  And you know, since they withdrew from Lebanon in 2000, this has given the Hezbollah six years to develop their infrastructure in Southern Lebanon, set up firing positions, stock pile over 10,000 rockets.  So you know, they‘ve had six years.

On the other side, the Israelis have had, you know, six years to develop how they were going to do this.  And it looked like this—this kidnapping was the catalyst that set this all off. 

MATTHEWS:  When you look at the targeting of Israeli rocket—aerial attacks in Lebanon, are they trying to prevent the Hezbollah groups from getting those two Israeli soldiers out of the country and perhaps to Iran?  Is that their strategy in hitting the forts, in your feel (ph)?

FRANCONA:  Initially, the first thing they did was, of course, they pocketed the runways at Beirut.  And that was to stop anybody from leaving out, or they shut down the airport. 

Then they set up the naval blockade to prevent anyone from going out by sea.  We also saw strikes on the Beirut-Damascus highway in an attempt to close that through the mountains and continue to strike on Hezbollah infrastructure.

Initially it was to prevent movement of those two soldiers.  But what they‘re doing now goes way beyond that.  It is set up to prevent any resupply of Hezbollah, and all that resupply comes from Syria, so they‘re cutting the roads to Syria and, of course, the main one being that Beirut-Damascus highway.  Everything comes through Damascus. 

MATTHEWS:  Last question.  Does Hezbollah really have 10,000 rockets?

FRANCONA:  You know, that‘s the number that‘s been bandied about.  It sounds large, but they‘ve had six years to stockpile these things.  And the Israelis are using that figure, so Hezbollah‘s not disputing it, and why would they, but you know, the Israelis have excellent intelligence.  I guess I‘ll go with their figure.

MATTHEWS:  OK, thank you very much, Lieutenant Colonel Rick Francona.

Coming up, President Bush and world leaders at the G-8 meeting issued a joint statement on the Middle East conflict today.  Are they all really on the same page?  A lot of meanings to those words.  We‘ll have a live report from St. Petersburg at the G-8.

You‘re watching a HARDBALL special report only on MSNBC. 

(COMMERCIAL BREAK)

MATTHEWS:  Welcome back to HARDBALL. 

World leaders at the G-8 summit agreed today to a call for a Middle East cease-fire, but they still disagree about who deserves the blame for that mess in the Middle East. 

We go now to NBC‘s Preston Mendenhall in St. Petersburg. 

(BEGIN VIDEOTAPE)

PRESTON MENDENHALL, NBC NEWS CORRESPONDENT:  Hi, Chris. 

Well, right off the bat here in St. Petersburg today, the focus of the meetings turned to the violence in the Middle East.  It was practically impossible for the leaders of the world‘s industrialized nation to ignore and sit idly by while that violence rages in the Middle East. 

So they overcame several differences and policies to come out with a joint statement that the leaders say they hope will create the conditions for a more permanent solution to the crisis there. 

Among those requirements, the return of the captured Israeli soldiers in Gaza and Lebanon, unharmed; also, an end to shelling of Israeli territory, rather; and an end to Israeli military operations in Lebanon and an early withdrawal of forces from Gaza.  The statement also calls for the release of arrested Palestinian ministers and parliamentarians.

Now, the statement also came with an offer to create the conditions or initiate dialogue between Israel and Lebanon, but, of course, these requirements and statements from the G-8 leaders don‘t have any real effect immediately.  There‘s no way to enforce them. 

Clearly, the leaders are hoping that their stature and also their desires reflect the wish of many in the international community that this violence be brought to a quick end. 

Now, it‘s important to point out that President Bush here ran into some trouble because of his unwavering—unwavering policy toward Israel.  Many of the European members of the G-8 don‘t agree with him on that.  They believe that the use of force by Israel has been too excessive so far. 

Now, also today, earlier, President Bush held a unilateral meeting with Prime Minister Tony Blair of Britain, the two men clearly close allies in all of this.  They lay the blame for the crisis in the Middle East on the—on Iran and Syria, and they also called for unity and restraint in the region. 

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES:  All sovereign nations have a right to defend themselves against terrorist attacks.  However, we hope that there was restraint. 

TONY BLAIR, PRIME MINISTER OF ISRAEL:  I think everyone will work very hard to find a common and unified position.  I think the essential point is this.  We all want the situation to calm down.  And we want it to calm dawn because we are mindful of the need to protect Lebanon‘s democracy. 

MENDENHALL:  Now, aside from the focus on the Mideast, there were plenty of scenes that one would expect at these meetings when these important leaders gather together, a lot of camaraderie. 

In particular, President Bush seemed to enjoy riding around in the golf carts.  He was one of the only leaders here to drive his own golf cart.  The others were—seemed to be happy having people drive them for him.  President Bush, though, zooming around. 

At one point this weekend, he already rode around with President Putin before the formal G-8 began. 

Also here at the G-8, no G-8 is complete without anti-globalization protests.  Hand here St. Petersburg had them this year, although they were very limited in number. 

Several dozen people were arrested when they tried to block a street in central St. Petersburg.  There have been some authorized protests, but Chris, they have kept them to a stadium that is several miles away from here.  They can‘t interfere with the summit at all. 

Chris, back to you. 

(END VIDEOTAPE)

MATTHEWS:  Thank you, Preston Mendenhall. 

More—for more on the G-8 reaction to the crisis in the Middle East, we go to “Newsweek‘s” Richard Wolffe.  He‘s also in St. Petersburg.

Richard, thank you very much.  Well, I‘ll leave it to you.  Tell us what can the United States do to stop the fighting in the Mideast?

RICHARD WOLFFE, “NEWSWEEK”:  Well, it can do a huge amount.  I mean, it‘s got a huge amount of diplomatic power and influence with a lot of countries in the region.  So you know, you‘re seeing them do the usual thing, which we all sort of brush aside, making phone calls, issuing statements here. 

But there‘s no question America has unique leverage with Israel and with especially some of these neighboring countries like Jordan, Egypt, and we‘ve also seen something from Saudi Arabia.  So you know, it‘s been very active.

MATTHEWS:  Well, the question is, is there a contradiction in our huge influence with Israel and our willingness to play on its broker?  This president seems to have had a difficult time playing those roles traditionally accepted by American presidents, to be a good friend of Israel but also an honest broker.  Does President Bush have that capability at this point to be seen as an honest broker by the other sides?

WOLFFE:  Well, you know, it‘s interesting.  This current crisis doesn‘t follow the usual pattern, where—certainly, the pattern we‘ve seen with the second Intifada, where America has been out there defending Israel and the rest of the world, especially the Arab world and to some extent the Europeans have been saying you‘ve got to do more.  You‘ve got to lean more on Israel.

The surprising thing about this current crisis is how from the get-go, a number of Arab countries, Saudi Arabia, Jordan, Egypt, and a lot of European countries shared the view that this whole thing was provoked by Hamas and Hezbollah. 

And while there have been, obviously, varying degrees of concern about the Israeli action, there‘s also a surprising shared analysis here that the problem here is Hezbollah and Hamas. 

And you just have to look at the sort of—the dynamic between Jacques Chirac and President Bush over the last few days.  Coming in, everyone thought Chirac, he gave a TV interview.  He said Israel used disproportionate force. 

When he got here, according to several officials I spoke to, not just American officials, behind closed doors, Chirac and Bush really agreed that the problem here was Syria, Iran, Hezbollah and Hamas.  And yes, they wanted Israel to stop, but the first step was dealing with that kind of extremist Islamic violence. 

MATTHEWS:  Do those parties, the French especially, but also the others in Europe, do they have the influence with Hezbollah to do anything about this conflict?

WOLFFE:  Not really.  They have more influence with Lebanon.  The French have a unique relationship with Lebanon.  And they were very effective in this resolution they keep selling everywhere, 1559.  It was a big deal.  The Syrians got out of Lebanon. 

But really, the kind of influence that matters to some of these countries.  You see something like Russia, for instance, obviously, where we are having a much more historic relationship with Syria, and to a lesser extent the Chinese, too, although they‘re on the fringes.  They can do something. 

MATTHEWS:  Richard, we‘ll get back to you tomorrow.  Thank you.  Richard Wolffe at the G-8 meeting at St. Petersburg.  I just saw the pines (ph) of Lebanon. 

Our coverage of the crisis in the Middle East will continue throughout the evening here on MSNBC.  Join Joe Scarborough in just one hour, on 9 Eastern, for live breaking coverage.  Right now it‘s time for “MEET THE PRESS”.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

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