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Chas Freeman, a former US ambassador to Saudi Arabia, withdrew from one of Barack Obama's top intelligence positions

A veteran American diplomat has resigned as one of Barack Obama's top intelligence officials over his strident criticisms of Israeli government policy.

Chas Freeman, a former US ambassador to Saudi Arabia, withdrew before starting work as chairman of the national intelligence council, accusing his critics of libel, character assassination and "utter disregard for the truth".

The "Israel Lobby", he argued, was stifling any discussion of US policy options in the Middle East except those endorsed by "the ruling faction in Israeli politics" - a situation that could "ultimately threaten the existence of the state of Israel".

Freeman's job would have involved producing National Intelligence Estimates, the authoritative documents intended to provide the president and senior policymakers with an overview of crucial security issues.

But numerous members of Congress have questioned Freeman's ability to carry out the task objectively, citing his view that until "Israeli violence against Palestinians" is halted, "it is utterly unrealistic to expect that Palestinians will stand down from violent resistance". They also questioned his business links with Saudi Arabia and his views on China.

"His statements against Israel were way over the top and severely out of step with the administration," said the New York Democratic senator, Chuck Schumer. "I repeatedly urged the White House to reject him, and I am glad they did the right thing."

Unlike the string of prominent Obama nominees who have withdrawn in recent weeks, Freeman did not have to be approved by Congress. But his departure - coming hours after the national intelligence director, Dennis Blair, defended him before a Senate committee - will embarrass the White House, and signals how reluctant the president may be to depart from Washington's current policies towards Israel and the Palestinians.

Freeman's critics noted that he was president of a Middle East thinktank part-funded by the Saudi regime, and serves as an adviser to an oil company owned by the Chinese government. In a posting to a foreign policy email list, attributed to Freeman, he appears to back Beijing's actions in the 1989 Tiananmen Square massacre, arguing that force should have been used sooner.

"I do not believe it is acceptable for any country to allow the heart of its national capital to be occupied by dissidents intent on disrupting the normal functions of government, however appealing to foreigners their propaganda may be," the posting reads.

But in a message on the website of the magazine Foreign Policy, Freeman claimed it was ironic to be accused of improper regard for foreign governments "by a group so clearly intent on enforcing adherence to the policies of a foreign government". He had never sought money from or been paid by any overseas power, he said.

"This is a country where you can say anything you want about the president, or any other policy, and it's really important for people to understand that this is the only issue you cannot discuss openly," said MJ Rosenberg, of the Israel Policy Forum. "I think if people perceive incorrectly that the Jewish community as a whole is behind these efforts to stifle dissent on this issue, that's dangerous."

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