With Israeli Prime Minister Benjamin Netanyahu about to make a historic visit to Australia in August 1998, Mr Downer suggested Mr Netanyahu was a hardliner.

He told cabinet there was every sign that Mr Netanyahu supported the band of Israelis, including the orthodox, who viewed the surrender of any land to the Palestinians as "sacrilegious and tantamount to treason" and were pushing aggressive settlement of the occupied territories.

"Mr Netanyahu is generally seen as personally opposed to the Oslo peace process but, mainly for tactical reasons (including to appease the moderates in his coalition, and to ensure his re-election as prime minister), he is trying to give the impression of support for it and of progress," Mr Downer says in a July 1998 submission to the Howard cabinet.

"Mr Netanyahu remains a controversial figure and the visit will therefore require careful handling," he said. "There will be some, both in Australia and in the Arab world, who will see the visit as tacit endorsement of some of Mr Netanyahu's policies on Middle East peace process issues, especially since many observers - including many Israelis - place the bulk of the blame for the current impasse squarely on the shoulders of Mr Netanyahu and his government."

Mr Downer said Mr Arafat and the moderates around him remained the best bet for long-term peace, although terrorist groups such as Hamas the Islamic Jihad were gaining support.

He recommended cabinet agree to dates for a visit to Australia by Palestinian leader Yasser Arafat. In May 2000, Prime Minister John Howard visited Mr Arafat in Palestinian territory and reiterated the invitation to Australia.

Mr Downer said Australia's approach to the Middle East should be "balanced and low-key".

Australia should build new links with the Palestinian Authority and vote "in a balanced way in the best possible company" on international resolutions relating to the peace process.

Australia had become "isolated in poor company" in its votes at the United Nations, with no other Western country joining Australia to abstain in the most recent vote and only the United States opposing.

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"There is, in fact, some risk that we are perceived as overly supportive of Israel. Whatever the rights and wrongs of this, a number of factors have combined in some Arab minds to suggest that we are too uncritical of Israeli policies," he wrote.

He urged Australia to condemn Palestinian and Israeli transgressions "with equal vigour".

"We will not be thanked by the United States and others if we are seen as reducing the pressure on Israel by being less forthright where the Israelis are being recalcitrant."

He said the Jewish community numbered about 1000,000 in Australia and the Arab community about 200,000, including 20,0000 Palestinians.

He also pointed to big opportunities to expand trade and investment ties with the Arabs, and suggested Australia should look at negotiating free-trade agreements with Israel and the Palestinians.

The Prime Minister's Department was evidently not keen on the idea, saying it had not been consulted on the submission.

"We are not aware of any work on the benefits of a free-trade arrangement", the department said, also recommending a stronger statement on terrorism, saying Australia should continue to stress its "emphatic opposition to terrorism and terrorist groups".

Mr Netanyahu remains prime minister of Israel, having taken the job again a decade ago. Since he retook power, a decade after his Howard-era visit to Australia, Mr Netanyahu has taken an increasingly hardline stance against the Palestinians.

In October 2018, Prime Minister Scott Morrison surprised the country by floating the possibility of moving the Australian embassy from Tel Aviv to Jerusalem, an announcement seen as a way to shore up Jewish votes in the Wentworth by-election. In December, he backed down, but nevertheless became one of the few countries to recognise West Jerusalem as the Israel capital, a decision Labor vowed to reverse.