Israel's nuclear program began more than 10 years before the big brown envelope landed on Nixon's desk. In 1958, Israel secretly initiated construction work at what was to become the Dimona nuclear research site. It wasn't until December 1960 that the United States identified what the facility was for. Months afterward, the CIA estimated that Israel could produce nuclear weapons within the decade.
The discovery presented a difficult challenge for U.S. policy makers: Only 15 years after the Holocaust, in an era when nuclear nonproliferation norms did not yet exist, Israel's founders believed they had a compelling case for acquiring nuclear weapons. From the U.S. perspective, Israel was a small, friendly state, albeit one outside the boundaries of formal U.S. alliance or security guarantees, surrounded by much larger enemies vowing to destroy it. Most significantly, Israel enjoyed unique domestic support in America. If the United States was unwilling to officially guarantee Israel's borders, how could it deny Israel the ultimate defense?
The Kennedy and Johnson administrations fashioned a complex scheme of annual inspections at Dimona to assure that Israel would not develop nuclear weapons. But the Israelis were adept at concealing their activities. By late 1966, Israel had reached the nuclear threshold, although it decided not to conduct an atomic test.
By the time Prime Minister Levi Eshkol visited President Lyndon B. Johnson in January 1968, the official State Department view was that despite Israel's growing nuclear weapons potential, it had "not embarked on a program to produce a nuclear weapon."  That assessment, however, eroded in the months ahead.
In November 1968, Paul Warnke, the assistant secretary of defense for international security, was engaged in intense negotiations with Israeli ambassador (and future prime minister) Yitzhak Rabin. At issue was a forthcoming sale of F-4 Phantom aircraft to Israel. The NPT had already been completed and submitted to states for their signature. U.S. officials believed that the F-4 deal provided leverage that would be America's last best chance to get Israel to sign the NPT.
Yet it was clear that the two negotiators came to the table with completely different mindsets. Israel had previously pledged not to be the first country to introduce nuclear weapons into the Middle East. But how does one define "introduce"? For Warnke, the physical presence of nuclear weapons entailed the act of introduction. Rabin, however, argued that for nuclear weapons to be introduced, they needed to be tested and publicly declared. By these criteria, he argued, Israel had remained faithful to its pledge.  When Warnke heard Rabin's interpretation, as he told one of the authors years later, he realized that Israel had already acquired the bomb. 
While Nixon and Kissinger may have been initially inclined to accommodate Israel's nuclear ambitions, they would have to find ways to manage senior State Department and Pentagon officials whose perspectives differed. Documents prepared between February and April 1969 reveal a great sense of urgency about Israel's nuclear progress. Henry Owen, chairman of the State Department's Policy Planning Council, wrote in February to Secretary of State William Rogers, "Intelligence indicates that Israel is rapidly developing a capability to produce and deploy nuclear weapons, and to deliver them by surface-to-surface missile or a plane. Recognizing the adverse repercussions of the disclosure, the Israelis are likely to work on their nuclear program clandestinely till they are ready to decide whether to deploy the weapons."  That same month, Defense Secretary Melvin Laird advised Rogers, Kissinger, and CIA Director Helms that he also believed that Israel had made significant progress on its nuclear and missile programs and "may have both this year."  The next month, he wrote that he had received additional evidence that enhanced his earlier assessment. 
In early April, Joseph Sisco, assistant secretary of state for Near Eastern and South Asian affairs, echoed Laird's intelligence assessment, but he was even more specific: He saw little "doubt that the green light has been given to Israeli technicians to develop the capability to build a bomb at short notice." It was possible, Sisco opined, that Israel would follow a "last wire" concept, "whereby all the components for a weapon are at hand, awaiting only final assembly and testing." 
Yet, the policy implications alarmed senior officials. As Laird wrote in late March, these "developments were not in the United States' interests and should, if at all possible, be stopped."  Sisco was not sure when or how Israel would "choose to display a nuclear weapon," but he agreed that a nuclear-armed Israel would have "far-reaching and even dangerous implications" for the United States, such as increased Arab-Israeli tensions (with a greater danger of a U.S.-Soviet confrontation), growing Arab disillusionment with the peace process, and encouragement of further nuclear proliferation in the Arab world and elsewhere. 
Although Sisco shared Laird's sense of urgency, they parted ways on what to do about it. Laird believed the United States should take measures, both carrots and sticks, to stop Israel from further nuclearization. Sisco was more dubious--some would say realistic--about what the Nixon administration could or should do about it. If the United States told Israel in unequivocal terms that its nuclear ambitions "would cause a fundamental change in the U.S.-Israel relationship," Sisco concluded that such an exchange would require open pressure and spark extraordinary domestic political controversy. And "halfway measures" such as using weapons deliveries "as leverage" would be "futile and probably counterproductive."  As it turned out, differences between Defense and State would lessen as the White House initiated the NSSM 40 exercise.
How much pressure the United States should exert remained open. Kissinger wanted to "avoid direct confrontation," while Richardson was willing to exert pressure if a probe to determine Israeli intentions showed that assurances would not be forthcoming. In such circumstances, the United States could tell the Israelis that deliveries of the F-4s would "have to be reconsidered." As to the missile issue, there was less than full agreement. Some suggested pressing Israel to dismantle its missiles, others proposed an agreement not to deploy missiles but to store them away. (The CIA representative, Gen. Robert Cushman, noted that Israel already had "11 missiles and would have between 25 to 30 by the end of 1970, 10, reportedly, with nuclear warheads.")
The recommendations began with the premise that Nixon should authorize a major effort to keep nuclear weapons from being introduced into the Middle East: Dismissing "unrealistic" options such as pushing Israel to give up its weapons program, it "will be our stated purpose . . . to stop Israel from assembling completed explosive devices." Moreover, the United States would ask Israel to sign and ratify the NPT by the end of the year and to privately reaffirm its non-introduction pledge, interpreting "introduction" to mean physical possession of nuclear weapons.
There was much less agreement as to how much, and how explicitly, the United States should use the F-4 sale as leverage: "The issue is whether we are prepared to imply--and to carry out if necessary--the threat not to deliver the Phantoms if Israel does not comply with our request" [underlined in the original].
By mid-July Nixon had decided that he was "leery" of using the Phantoms as leverage, which meant that when Richardson and Packard met with Rabin on July 29, 1969, the idea of a probe that would involve some form of pressure had been torpedoed.  While Richardson and Packard emphasized the "seriousness" with which they viewed the nuclear problem, they had no big stick to support their rhetoric, except to the extent of implying a loose linkage by rebuffing Rabin's request for an August (one-month advance) delivery of the F-4s.
Subsequent memoranda from Kissinger to Nixon provide a limited sense of what Kissinger thought happened at the meeting. He noted that the president had emphasized to the prime minister that "our primary concern was that the Israeli [government] make no visible introduction of nuclear weapons or undertake a nuclear test program." In other words, Nixon had pressed her to abide by Rabin's interpretation that the "introduction of nuclear weapons" would mean a nuclear test or a formal declaration. Thus, Israel would be committed to maintaining full secrecy over its nuclear activities, keeping their status ambiguous and uncertain. Meir also confirmed that the NPT issue would not be settled until after the elections and that missiles would not be deployed "for at least three years." 
While members of the SRG still raised the possibility of renewed pressure on Israel to sign the NPT, Kissinger waited for Jerusalem's formal response to the U.S. query on the treaty. On February 23, 1970, Rabin went alone to see Kissinger at his office. He came to inform him that Richardson had just called him in about the NPT, and he wanted the president to know that, in light of the conversation Nixon had with Meir in September, "Israel has no intention to sign the NPT." Rabin, Kissinger wrote, "wanted also to make sure there was no misapprehension at the White House about Israel's current intentions." He also sought an assurance that Washington would not establish any linkage between the NPT and arms sales to Israel. Kissinger ended his memo with one sentence: "I was noncommittal and told him that his message would be transmitted to the president." 
Sources: Excerpted with permission from Avner Cohen and William Burr, “Israel crosses the threshold,” Bulletin of the Atomic Scientists, pp.22-30, vol.62, no.3, (May/June 2006).