Hizb Allah and Israel, through German mediators, were negotiating the exchange of 19 Lebanese detainees, many being held without trial or charge, with three Israeli soldiers and a suspected Mossad agent captured three years ago.
An anonymous source close to Hizb Allah was quoted on Wednesday as saying that a public and military uproar in Israel over any exchange that did not include air navigator Arad forced Israeli Prime Minister, Ariel Sharon, to suspend the talks.
Arad has been missing since his warplane was shot down over Lebanon in 1986.
But the resistance group denied in an official statement that
talks were on hold. It gave no further details on the state of
"Israel insists now on including Arad in any exchange deal ... Hizb Allah has told the mediator that it did not know the whereabouts of Arad but that it was willing to continue looking for him," the source said.
Hopes have been high that a deal could be reached within the coming weeks. The latest talks were described by both sides as some of the most positive.
The deal was expected to include about 400 Arab and Palestinian detainees, including Fatah leader Marwan al-Barghuthi, being held in Israel.
Ron Arad missing
Israel kidnapped two leading Hizb Allah figures, Shaikh Abd al-Karim Ubaid and Mustafa Dirani in 1989 and 1994 respectively, and continues to hold them as bargaining chips in exchange for Arad.
The Israeli source said the negotiations over the past weeks had also touched on two Hizb Allah members jailed in Germany on "terrorism" charges. He did not give any further details.
Hizb Allah Secretary General Sayyid Hasan Nasr Allah had warned in August the group would capture more Israeli soldiers if a swap did not take place soon.
Israel claims the suspected Mossad agent, Elhanen Tannenbaum, is a businessman. Hizb Allah says they lured him to Beirut.
The group spearheaded a resistance movement to oust Israeli troops from south Lebanon in May 2000, following a 22-year occupation.