It was just a Washington lunch--one that the FBI happened to be monitoring. Nearly a year and a half ago, agents were monitoring a conversation between an Israeli Embassy official and a lobbyist for American Israel Public Affairs Committee, or AIPAC, as part of a probe into possible Israeli spying. Suddenly, and quite unexpectedly, in the description of one intelligence official, another American "walked in" to the lunch out of the blue. Agents at first didn't know who the man was. They were stunned to discover he was Larry Franklin, a desk officer with the Near East and South Asia office at the Pentagon.

Franklin soon became a subject of the FBI investigation as well. Now he may face charges, accused of divulging to Israel classified information on U.S. government plans regarding Iran, officials say. While some U.S. officials warned against exaggerated accusations of spying, one administration source described the case as the most significant Israeli espionage investigation in Washington since Jonathan Pollard, an American who was imprisoned for life in 1987 for passing U.S. Navy secrets to the Israelis. The FBI and Justice Department are still reviewing the evidence, but one intelligence source believes Franklin may be arrested shortly.

The probe itself amounts to another embarrassing problem for Donald Rumsfeld, the beleaguered Defense secretary. It comes during a week in which violence flared up again in Iraq and a Pentagon investigation indirectly blamed Rumsfeld for poor oversight in the Abu Ghraib prisoner-abuse scandal. In a statement, the Defense Department said it "has been cooperating with the Department of Justice on this matter for an extended period of time."

At first blush, officials close to the investigation say, Franklin seemed an unlikely suspect: he was described as a midlevel policy "wonk" with a doctorate who had toiled for some time on Mideast affairs. Yet he had previously worked at the Defense Intelligence Agency, and there was at least one other aspect to his background that caught the FBI's attention: although Franklin was not Jewish, he was an Army reservist who did his reserve duty at the U.S. Embassy in Tel Aviv.

FBI counterintelligence agents began tracking him, and at one point watched him allegedly attempt to pass a classified U.S. policy document on Iran to one of the surveillance targets, according to a U.S. intelligence official. But his alleged confederate was "too smart," the official said, and refused to take it. Instead, he asked Franklin to brief him on its contents--and Franklin allegedly obliged. Franklin also passed information gleaned from more highly classified documents, the official said. If the government is correct, Franklin's motive appears to have been ideological rather than financial. There is no evidence that money changed hands. "For whatever reason, the guy hates Iran passionately," the official said, referring to the Iranian government.

NEWSWEEK's efforts to reach Franklin or a lawyer representing him were unsuccessful. But a close friend, Michael Ledeen of the American Enterprise Institute, said he believes the charges against Franklin are "nonsensical." Officials say that Franklin began cooperating about a month ago, after he was confronted by the FBI. At the time, these officials say, Franklin acknowledged meetings with the Israeli contact. Law-enforcement officials say they have no evidence that anyone above Franklin at the Pentagon had any knowledge of his activities.

Israeli officials, meanwhile, bristled at the suggestion of espionage. Ephraim Sneh, a member of Parliament and a retired general who has been monitoring the development of nukes in Iran for years, said that Israel would be crazy to spy on its best friend. "Since Pollard, we avoid any intelligence activity on U.S. soil," Sneh said in an interview. "I know the policy; I've been in this business for years. We avoid anything that even smells like intelligence-gathering in the U.S." Another Israeli official contended that the Israelis had no cause to steal secrets because anything important on Iran is already exchanged between the CIA and the Mossad, Israel's spy agency. In a statement, AIPAC denied that any of its employees received information "they believed was secret or classified," and said it was cooperating.

U.S. investigators would not reveal what kind of information Franklin was allegedly trying to divulge to Israel. But for months the administration has been debating what to do about Iran's clerical regime as well as its alleged program to build nuclear weapons--a subject of keen interest to the Israelis, who have quietly warned Washington that they will not permit Tehran to gain nuclear capability.

Franklin was known to be one of a tightly knit group of pro-Israel hawks in the Pentagon associated with his immediate superior, William Luti, the hard-charging and impassioned protege of former House speaker Newt Gingrich. As deputy assistant secretary of Defense for Near East affairs, Luti was a key player in planning the Iraq war. He, in turn, works in the office of Under Secretary Douglas Feith, a career lawyer who, before he became the Pentagon's No. 3, was a sometime consultant for Likud, Israeli Prime Minister Ariel Sharon's political party. Officials say they have no evidence that either Feith or Luti had any knowledge of Franklin's discussions with the Israelis.

Franklin has also been among the subjects of a separate probe being conducted by the Senate intelligence committee. Part of that investigation concerns alleged "rogue" intelligence activities by Feith's staff. Among these activities was a series of meetings that Franklin and one of his colleagues, Harold Rhode, had in Paris in late 2001 with Manucher Ghorbanifar, the shadowy Iranian arms dealer made infamous during the Iran-contra scandal of the 1980s. One purpose of those meetings was to explore a scheme for overthrowing the mullahs in Iran, though Rumsfeld later said the plan was never seriously considered. But so far, there is no evidence that the Ghorbanifar contacts are related to the espionage probe. And officials familiar with the case suggest that the political damage to Bush and the Pentagon may prove to be more serious than the damage to national security.