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The Situation Room

Battle Between Israel, Hezbollah Amps Up; Bush Meets with Russian President; Former Secretary of State Weighs in on Middle East Crisis; Yona Yahav Interview; Iran's President Blasting What He Calls Zionist Invasion of Lebanon

Aired July 14, 2006 - 16:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

WOLF BLITZER, CNN ANCHOR: Thanks very much, Ali.
And to our viewers, you are in THE SITUATION ROOM, where new pictures and information are arriving all the time. Standing by, CNN reporters across the United States and around the world to bring you today's top stories.

Happening now, the Middle East in meltdown. It's 11 p.m. south of Beirut, where Israeli war planes have struck at the heart of Hezbollah. The guerrilla group keeps firing back with a rocket barrage in Northern Israel. Is there any hope for a cease-fire? Or does this mean all-out war? We have live reports from the region.

Plus we'll get insights into the spiraling conflict from government insiders in Israel, as well as here in the United States. The former Israeli prime minister, Benjamin Netanyahu, and former secretary of state, Lawrence Eagleburger, they're standing by.

Also this hour, former CIA agent Valerie Plame Wilson speaking out, accusing Vice President Dick Cheney and others in the administration of shameful conduct. It's 4 p.m. here in Washington, where Wilson and her husband say they expect their new lawsuit against the Bush administration officials to be a tough fight.

I'm Wolf Blitzer. You're in the SITUATION ROOM.

Hezbollah leader, Hassan Nasrallah, is declaring open war with Israel after Israeli war planes attack the militant group's stronghold south of Beirut and hit the building where Nasrallah lives.

The Israeli cabinet today gave the green light to continue the assault by land, sea and air in retaliation for the kidnapping of two Israeli soldiers. Hezbollah fighters are on the offensive, as well, stepping up rocket attacks on Northern Israel. And Israel says one of its gunboats off Lebanon has been lightly damaged by what appears to be a rocket.

At least 63 people in Lebanon have been killed in the fighting and at least 10 Israelis have died and dozens have been injured in both countries. Thousands of Lebanese are pouring across the border to Syria to try to escape the attacks by Israel.

Lebanon's prime minister says he's asked President Bush to press for a cease-fire. And he tells CNN Hezbollah's abduction of those two Israeli soldiers was a, quote, "tactical mistake," but he says Israel is overreacting right now.

(BEGIN VIDEO CLIP)

FOUAD SINIORA, LEBANESE PRIME MINISTER: Lebanon should not be dealt this way. Actually, the retaliation of Israel against the abduction of the two soldiers across the borderline (ph) is in no way proportionate. It is disproportionate to what's been done. And it's not the way to deal with things.

(END VIDEO CLIP)

BLITZER: We have reporters standing by throughout the region. Suzanne Malveaux is covering the president's trip in Russia at the G- 8. John Vause is in Northern Israel. Let's go to Beirut first, Alessio Vinci, our man on the scene with the latest from the Lebanese capital -- Alessio.

ALESSIO VINCI, CNN CORRESPONDENT: Hello Wolf.

We witnessed an extraordinary succession of events in rapid succession, that is. And indicating how quickly the conflict here can escalate.

First of all, an Israeli gunship firing the rockets at the headquarters of Hezbollah in the southern part of Beirut, destroying the home and offices of the Hezbollah leader, Sheikh Hassan Nasrallah.

And moments later, just really moments later, the sheikh appearing, making an appearance on Hezbollah television here, Al- Manar, making an audiotape, basically saying that he was doing fine and declaring all-out war on Israel.

(BEGIN VIDEO CLIP)

HASSAN NASRALLAH, LEADER OF HEZBOLLAH (through translator): I will not say if you hit Beirut, we will hit Haifa. I will not say, if you hit the Dahiya, the southern district, we'll hit Haifa. This equation, you want it to fall, it will fill (ph). We together, you want open war? We will go to the open war. And we are ready for it, and we are ready for it. War, war on every level. To Haifa and, believe me, to after Haifa and to after and beyond, and beyond Haifa.

(END VIDEO CLIP)

VINCI: At the very end of that audio message, Wolf, Sheikh Nasrallah basically telling his viewers that they have to look out their windows at the gunship that was -- had hit hard at the heart of Beirut, because that ship would be -- would be hit and sunk with all its sailors on board.

And guess what? Moments later the IDF confirmed that what appeared to be a rocket had actually slightly damaged one of the ships off the coast in Beirut. And here in the streets of Beirut in that section of southern Beirut, we heard celebratory gunfire. So there is definitely here a feeling in the streets of Beirut, in that part of Beirut, of course, that the escalation is really going up really fast -- Wolf.

BLITZER: Alessio, the Israelis say what they're trying to do is effectively destroy the military capability of Hezbollah in Lebanon and that they're methodically trying to go after warehouses, stockpiles of rockets and missiles, ammunition and other equipment.

Is there an element of the Lebanese population that's sort of secretly, quietly applauding this effort by the Israelis to weaken Hezbollah?

VINCI: No, I don't think so. I think that overall the only thing that really is uniting this currently divided country is the fact that that they are all condemning the Israeli attacks, which is not only targeting Hezbollah headquarters but also many, many, many civilian targets, including bridges, gas stations, fuel -- fuel stations, as well, of course, as the international airports.

We're seeing now not just the non-nationals leaving Lebanon but many, many Lebanese. So there's definitely a feeling here that Israel is not just hitting at Hezbollah but also at the general population and that is why people here really do not support this kind of action even if it is weakening Hezbollah.

BLITZER: All right, Alessio. Alessio is on the scene in Beirut for us. Thank you.

As Hezbollah's leader vows to strike again at the Israeli city of Haifa, the target of an unprecedented rocket attack only yesterday, more rockets are raining down on Northern Israel.

CNN's John Vause is joining us now from the hard hit town of Nahariya in northern part of Israel. What's it like there, John?

JOHN VAUSE, CNN CORRESPONDENT: Hello, Wolf.

Well, it is eerily quiet here tonight as many residents are seeking shelter, but two more Israeli civilians have been killed after the Israeli military says Hezbollah militants have fired more than 90 Katyusha rockets today, more than 300 in the past 48 hours.

In the small farming village of Meron, a woman and her 4-year-old grandson died when their house took a direct hit. More than a dozen Israeli towns and communities have come under attack today.

Here in Nahariya, where we are tonight, this city has been hit twice. Here, at least 30 people have been wounded, and the Katyushas have been coming down on the city of Safed. There, a dozen people have been hurt.

Residents about 14 miles out from the Lebanon border have been advised by the military to seek protection in bomb shelters and other safe rooms, as well as residents another 30 miles out. They're being advised by the military to stay off the streets and to stay indoors.

That includes residents of the city of Haifa, after the port city was hit by two rockets on Thursday evening, the military now saying they were not the regular Katyusha rockets fired by Hezbollah. They had a much longer range. The Israeli officials saying those missiles were made in Iran, but so far, they've offered no proof of that -- Wolf.

BLITZER: How far are you right from the Lebanese border in Nahariya, John?

VAUSE: We're probably about ten miles, maybe six miles away from the Lebanese border. It's very, very close. There are communities closer to the border than where we are. And this area, basically, has come under -- has sustained some of the more serious attacks over the last 48 hours, Wolf. This is one of the towns where a woman died on Thursday.

BLITZER: John Vause in Nahariya, Northern Israel, for us. John, be careful over there. Thank you very much.

Now to another front in this Middle East conflict. Hamas militants today blew open a gate on the border between Gaza and Egypt, and that allowed hundreds of Palestinians caught on the other side, in Sinai, to cross back into Gaza. A tense scene, as several Israeli helicopters hovered overhead.

The border crossing has been closed for nearly three weeks since the kidnapping of that Israeli soldier near Gaza.

Israel responded, as you know, with an offensive aimed at trying to recover that soldier, halting Palestinian rocket fire and punishing Hamas, which now controls the Palestinian Authority.

But almost 1,000 Palestinians managed to come back into Gaza from Sinai, thanks to that hole that the Palestinians created in that wall.

President Bush, meanwhile, is in Russia for the G-8 summit, watching all of this very, very carefully. He's working the phones, calling Middle East leaders about this explosion of violence in the Middle East.

Let's bring in our CNN White House correspondent, Suzanne Malveaux. She's covering the president in St. Petersburg, Russia.

Suzanne, update us on how the president is dealing with this Middle East crisis.

SUZANNE MALVEAUX, CNN WHITE HOUSE CORRESPONDENT: Certainly, Wolf.

President Bush is here in St. Petersburg for really two days before the official opening of the G-8 summit. White House officials say to have private and frank discussions with his old friend, Vladimir Putin. The reported tension over North Korea, Iran, human rights, all of it, of course, threatening the G-8 agenda, to overshadow that.

But what is key here, what is clear is that it's the Middle East peace process, the crisis that is really taking center stage. Before Air Force One even touched down, President Bush was on the phone with key allies in the region, the leaders of Egypt and Jordan, not only to thank them for trying to deescalate the crisis but also trying to push them to use their influence with Hezbollah to return those Israeli soldiers.

President Bush also, of course, calling the prime minister of Lebanon Siniora to reassure him that he is in touch, the administration in touch with the Israeli government to try to push them, of course, to exercise some restraint to protect the innocent and also to respect Siniora's authority.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: My biggest concern is whether or not actions taken will weaken the Siniora government.

The democracy in Lebanon is an important part of laying a -- you know, a foundation for peace in that region. We have worked really hard to get Syria out of Lebanon. U.N. Resolution 1559 and its follow-up resolution 1680 were manifestations of the work of the international community to get Syria out of Lebanon.

We've always felt that a democracy in Lebanon is important for the Lebanese people and is important for the region. So the concern is that any activities by Israel to protect herself will weaken that government. We have made that -- or topple that government, and we have made it clear in our discussions.

(END VIDEO CLIP)

MALVEAUX: And, Wolf, White House officials are denying that President Bush is calling for Israel to stop its attacks. White House officials saying that that is really a call to be made by Israeli military officials -- Wolf.

BLITZER: Susan Malveaux, traveling with the president in St. Petersburg, Russia. Thank you.

Let's check in with Jack Cafferty. He's got the "Cafferty File" -- Jack.

JACK CAFFERTY, ANCHOR: Thanks, Wolf.

There's a new poll out that shows the vast majority of Americans are disgusted with the state of the union. An A.P./IPSOS poll shows 67 percent of us say things in this country are on the wrong track; only 30 percent of us say we're headed in the right direction.

So who's in charge of the direction? Well, let's see, that would be President Bush. Sixty-three percent of us say he's doing a lousy job; only 36 percent approve of his performance.

Who else is in charge of our direction? Oh, yes, Congress. They are held in more contempt than the president: 27 percent approve of the job Congress is doing, 68 percent disapprove.

Meanwhile, we've got these midterm elections coming up less than four months away now, so who would the public want to take over the reins in Washington? If the elections were held today, 36 percent would like to see the Republicans in control of Congress. Fifty-three percent say they want the Democrats in charge.

Given the fact that 68 percent of Americans think Congress is doing a crummy job and both houses are currently controlled by Republicans, here's the question: are Republicans in danger of losing control of the Congress in November? Your thoughts, CaffertyFile@CNN.com or go to CNN.com/CaffertyFile.

A pretty sad state of affairs: 36 percent of us think the president is doing a good job, Wolf. Only 27 percent of us think those clowns down the street on the Hill are doing their job well.

BLITZER: All those numbers have been very, very steady now in a lot of polls over these past several months.

CAFFERTY: Yes, no improvement at all.

BLITZER: Thanks, Jack, very much.

Coming up, more new developments in the Middle East crisis. I'll ask former secretary of state, Lawrence Eagleburger, always outspoken, whether a diplomatic solution possible.

Plus, will the open war, as the Hezbollah leader calls it, have a reverse domino effect in the Middle East? Our Jeff Greenfield looks at the fight to bring democracy to the region, including Iraq.

And later, you may have seen her face before. You certainly have if you've seen this program. But you probably haven't heard her voice until now. The former CIA operative, Valerie Plame Wilson, speaking out about the leak that made her famous and about her new lawsuit against the vice president, Karl Rove and Lewis "Scooter" Libby. Stay with us. You're in the SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Checking some of the new developments in the Middle East, Hezbollah's leader is declaring open war with Israel. Iran's president is expressing support for Lebanon and Syria and is calling on Israel to, quote, "end its aggression." Lebanon's prime minister suggesting that Hezbollah was irresponsible in kidnapping those two Israeli soldiers, but he calls Israel's response, quote, "disproportionate."

And the Pentagon is developing scenarios for evacuating perhaps as many as 25,000 U.S. Americans from Lebanon if necessary.

The crisis in the Middle East is a daunting test for a bedrock principle of the Bush administration. Here's our senior analyst, Jeff Greenfield -- Jeff.

(BEGIN VIDEOTAPE)

JEFF GREENFIELD, CNN SENIOR ANALYST: Wolf, conflicts produce casualties, not just among combatants and civilians, but for hopes, ideas, policies. Right now one potential casualty of Middle East violence is a root premise of the Bush administration, that the spread of democracy is the best way to increase the prospects for stability and peace in that region.

(voice-over): All during the run-up for the Iraq invasion and ever since, the president has argued that there is an inextricable link between freedom and stability.

BUSH: We seek the advance of democracy for the most practical of reasons, because democracies do not support terrorists or threaten the world with weapons of mass murder.

And as freedom advances, heart by heart, and nation by nation, America will be more secure, and the world more peaceful.

GREENFIELD: Moreover, prominent neoconservatives have been arguing for years that the replacement of Saddam Hussein by a free Iraqi government would trigger a benevolent reverse domino effect in the region, encouraging regime change in Iran, which would in turn dry up support for Hezbollah and Islamic Jihad, which would in turn increase chances for Middle East peace.

Well, there have been exercises in democracy in the region, at least if we define democracy in the narrow sense of relatively free elections. Hezbollah, condemned by the United States as a terrorist organization, ran in the Lebanese elections last year, won about 20 percent of the seats in parliament and heads two cabinet ministries. But that political power has greatly limited the power of Lebanon's government to disarm Hezbollah, which now holds two Israeli soldiers.

Iran, which funds and supports Hezbollah, had a free election in June of 2005 and chose as its president Mahmoud Ahmadinejad, who has repeatedly denied that the Holocaust ever happened and has made what may be charitably described as provocative threats against the very existence of Israel.

And in January of this year, Hamas, another organization the U.S. calls a terrorist organization, won a landslide victory in Palestinian parliamentary elections. Hamas claims responsibility for capturing an Israeli soldier, an act which triggered the violence that now threatens to spread to Syria and possibly even Iran.

(on camera): It would, of course, be ludicrous to look at the source of current trouble in the Middle East in the decision to invade Iraq. The Middle East has been at or over the edge of violence for decades.

But it's also fair to ask whether the optimism about democracy was well placed. From Germany in the '30s to Yugoslavia 15 years ago, freely elected governments have pursued highly aggressive policies, and given more recent events, the idea that the spread of democracy would inevitably lessen hostility seems to have been severely weakened by events -- Wolf.

(END VIDEOTAPE)

BLITZER: Jeff Greenfield, thank you very much.

Let's talk a little bit more about the exploding tensions of the Middle East and the stakes for the U.S. and the world. For that, we're joined by the former secretary of state, Lawrence Eagleburger. He's joining us from Charlottesville, Virginia.

Mr. Secretary, first of all, what do you make of what Jeff Greenfield just said about democracy maybe backfiring a little bit?

LAWRENCE EAGLEBURGER, FORMER SECRETARY OF STATE: Well, if you take it in the very short terms that he has, it's clear that, you know, these governments have been -- these people have been elected by people who are unhappy with the way in which, for instance, Arafat had been running the Palestinian process.

The point here, I think, what the president is talking about and what I think makes sense, democracy, when it takes root in that part of the world and begins to flourish, then I think things begin to change.

I think it's unfair to charge Bush with a failure here on democracy over these -- these particular elections, particularly in Iran, where you may call it free if you wish, but as you will recall, there were any number of candidates who were refused a place on the ticket.

So I think what you have to talk about is democracy as it takes root in this part of the world, not some particular election, in which a lot of very unhappy Palestinians, for example, threw out one bunch of crooks for another.

BLITZER: The Israelis are coming under a lot of criticism, including from Europeans, that they're overreacting to the killing and kidnapping of these Israeli soldiers. The French president, Jacques Chirac, saying, "I find honestly, like most Europeans, that the reactions are completely disproportionate."

Did Israel overreact?

EAGLEBURGER: No. If you want to put it in strictly, again, the narrow context of a couple of soldiers being captured, and then the Israelis reacting, I guess you could argue yes.

But the fact of the matter is -- put it in our terms. If this same sort of thing were happening in the United States, do you think we would be exercising restraint in trying to stop it?

As far as I'm concerned, the Israelis have every right to be doing what they are now doing. Whether or not it's effective is another question. But I think they have a right to defend themselves, and I think they have a right when others are attacking them from outside Israel, they have a right to go after them. And finally, I would say so long as the Iranians can put arms into -- into Hezbollah through Syria, I think we have a continuing problem. And I, for a long time have felt we had to get much tougher with the Syrians than we are now. It may be that the Iraq issue has made it more difficult for us to get tough. But the Syrians...

BLITZER: What does that mean, Mr. Secretary...

EAGLEBURGER: What?

BLITZER: What does that mean, Mr. Secretary, to get tougher with the Syrians?

EAGLEBURGER: Well, what it means to me is that we, for one thing, ought to be putting real pressure on their border with Iraq more than we are, and I think putting economic pressure on them. And frankly, I don't care as well, if we go in along with the Israelis and drop a few bombs on them.

Or at least put it this way, I would not object if the Israelis get tougher with the Syrians. The only danger there is the Israelis, I think, are already being pushed to the limits of how much they can do.

But if it requires putting some force into the game with Syria, I would do it. I wouldn't start there, but I think if the Syrians were to understand very clearly that the next step on our part was to get really nasty, that might begin to change some things.

BLITZER: How do you get the Iranians to stop funding and providing military equipment to Hezbollah?

EAGLEBURGER: I don't know how you do that, because our ability to limit the Iranians is, to put it mildly, less than much.

I do think if you can stop the Iranian flow of support through Syria into Hezbollah, that begins to make a difference. In other words, here the key to some degree in this regard is Syria. If the Iranians can't get the stuff there, then it begins to weaken the Hezbollah and it limits, as well, Iran's influence.

But I have no idea at this how we can do much with regard to Iran, unless we are prepared to get much nastier than I think we should be or are at the moment, particularly given the support of our very wonderful and courageous European allies.

BLITZER: Some have suggested that the Bush administration should dispatch some very high-level special envoys to the region to try to cool things down so that an all-out regional war doesn't develop. A Lebanese politician the other day on my Sunday show, Fayoud Mahzoumi (ph), suggested that the first president Bush and Bill Clinton get together, for example, and go back and try to ease this crisis. Is this a good idea?

EAGLEBURGER: I guess, Wolf, that I have to say is that, at this stage, I don't know that I would ask two presidents to do this. But at this stage if the president wants to select somebody who is well- known and has a great deal of respect in that part of the world to go over and see what he can do, I won't object.

But I must tell you -- in fact, I'd support it, I guess. But I would support it largely because it would be a demonstration that the United States is trying to do what it can to cool things there. I do not, in substance, I don't think it's going to make much distance. But as theater, I don't mind doing it.

BLITZER: Lawrence Eagleburger, the former secretary of state, thanks for coming in.

EAGLEBURGER: My pleasure, Wolf.

BLITZER: And still ahead here in THE SITUATION ROOM. With the Middle East teetering on the brink of war, how high will oil prices surge? We're going to get an update on that. And the warnings for U.S. citizens to get out and stay out of Lebanon.

Plus, a very different kind of threat here at home. Wildfires raging in Southern California right now. Are crews battling the blaze making any headway at all? Stay with us; we'll be right back.

(COMMERCIAL BREAK)

BLITZER: Welcome back to THE SITUATION ROOM. I'm Wolf Blitzer in Washington.

The crisis in the Middle East exploding now for a third day. In new attacks, Israel keeps smashing Lebanon's links to the outside world, and Israeli war planes struck the stronghold of the Hezbollah militants south of Beirut in another act of retaliation for Israel's capture -- the capture -- Hezbollah's capture of two Israeli soldiers.

Hezbollah's leader is declaring open war with Israel, and its fighters are bombarding Northern Israel with more rockets. Israel's ambassador to the United Nations charged today that the longer range missiles fired at Haifa yesterday were actually made in Iran.

And, on another front, there's a tense situation unfolding in Gaza. Hamas militants today blew open a border gate into Egypt, allowing hundreds of Palestinians to pass through. The border crossing had been closed for nearly three weeks, since the kidnapping of an Israeli soldier.

Now we want to get a check on the situation in Haifa today, the target of an unprecedented rocket attack yesterday and chilling new threats today.

Joining us on the phone from Haifa is the mayor, Yona Yahav.

Mr. Mayor, thanks very much for joining us.

Give us a little flavor of what it's like to be living, a resident of Haifa, a city of about 300,000 people.

YONA YAHAV, MAYOR OF HAIFA, ISRAEL: We are not used to be attacked by terrorists, even though that we are experienced in that.

In the first Iraqi war, we got hit by two missiles. One hit the Haifa bay zone. And the second hit the mountain. And after so and so many years we are again in the same picture.

And the -- I must tell you that the Haifa community is very courageous. They didn't do a big fuss out of it. And a day afterwards, the people came back to their routine. And they overcrowded the streets. And we had to announce, and we had to ask them to take precautions.

And I was now wandering around with my car along the streets of the city, and I must tell you that the city is empty. Usually, a Friday evening, the restaurants, the cafe houses, the parks are solid packed. And, today, they are nearly empty.

BLITZER: Are people being advised to stay in bunkers, to go underground at night?

YAHAV: No, no, absolutely not.

This advice were conveyed to the people are living up north. But, in Haifa, the people are being requested to stay at home, and not more than that.

BLITZER: I know you are in touch with Israeli military authorities. What are they saying about the range of these Hezbollah rockets, two of which actually reached Haifa? Do they have the kind of rockets or missiles that could cause damage to your community?

YAHAV: We took in account that the possibility of this kind is possible.

And we knew that the Hezbollah people having in their arsenal kind of missiles which can be shot and get 35 or 45 kilometers. And the laboratory, ballistic laboratory, which checked the missile which hit Stella Maris in Haifa, they found out that it's Iranian-made.

And the specialty about this rocket was that it contained thousands of small metal bullets, which could spread around and hit a very substantial amount of people. This is the reason why the chief command of the city has announced and advised to the people to stay at home, because, if the same missile will hit again, it can be very dangerous for people, because it's the same system like a suicide bomber belt.

BLITZER: Yona Yahav is the mayor of Haifa.

Mr. Mayor, good luck to you and the residents of Haifa. Thanks very much for joining us.

(CROSSTALK)

YAHAV: ... shalom.

BLITZER: Thank you very much. YAHAV: Bye-bye.

BLITZER: And want to inform our viewers, we are trying to get in touch -- in fact, we have been in touch with the mayor of Beirut as well. We're hoping to speak with him on the phone at some point, but that's not as easy as it may seen, given the current situation unfolding in Beirut. But we will keep on trying.

Meanwhile, military sources are telling CNN, the Pentagon is crafting scenarios to evacuate the estimated 25,000 U.S. citizens in Lebanon. While no orders have yet been issued, Americans are asked to remain in direct contact with the U.S. Embassy in Beirut.

Here with a little bit more on this developing situation is our Internet reporter, Abbi Tatton.

ABBI TATTON, CNN INTERNET REPORTER: Wolf, a new travel warning has been issued by the Department of State, urging U.S. citizens in Lebanon to consider departing the country, a recommendation certainly complicated by those strikes on Beirut's international airport.

It does goes on to say, if you are staying in the country, urging people to register with the U.S. Embassy in Beirut. That way, if the situation develops or worsens, the U.S. Embassy can keep in contact with those U.S. citizens there.

It goes on to warn U.S. citizens away from trouble spots, southern Beirut, and also warns of the possibility of anti-U.S. demonstrations in Beirut.

At the U.S. Embassy Web site in Beirut, a further update has been issued just in the last few hours, that also urging people to register, to stay in contact, and also going on to say that the embassy recommends that American citizens remain in a secure location indoors, and follow the instructions of local authorities at this time -- Wolf.

BLITZER: Abbi, thank you.

Fredricka Whitfield is joining us from the CNN Center in Atlanta with a closer look at some other important stories making news -- Fred.

FREDRICKA WHITFIELD, CNN ANCHOR: Hello to you, Wolf.

Hot and horrible, that's how a spokeswoman is describing conditions for nearly 3,000 firefighters battling wildfires in Southern California. Two major blazes are, at this hour, said to be within a half-mile of each other, threatening to merge.

Hundreds of families are now under evacuation orders. Together, the two fires have burned more than 60,000 acres and are less than 20 percent contained.

Space shuttle astronauts are, right now, performing a final round of safety checks, before heading back to Earth. The latest inspections are designed to look for small nicks and cracks in the shuttle's heat shield that could have been caused by collisions with tiny space particles. A series of earlier tests detected no damage from debris during launch.

And police, at this hour, are investigating a suspicious envelope with white powder that showed up at "The New York Times" headquarters today. A mailroom employee who opened the envelope is undergoing testing. The envelope is said to have had a Philadelphia postmark, and no return address.

And oil prices and stock prices are continuing to sprint in opposite directions. A short while ago, in New York, benchmark U.S. oil futures closed at just over $77 per barrel, another record.

Earlier in the day, the price reached to an all-time high of $78.40. Meanwhile, the three U.S. major stock indices fell sharply again today, the third straight day of steep declines. Dow Jones industrial average gains for the year have now been almost entirely wiped out.

Many analysts expect gas prices to rise sharply over the next two weeks. And, just a short while ago, the head of one major U.S. energy company reportedly warned U.S. consumers not to expect gas prices to drop after the high demand of the summer passes -- Wolf.

BLITZER: Fred, thank you very much. We will come back to you shortly.

Just ahead: Israel targeted by Hezbollah fighters, firing right back on Lebanon in the militant group's stronghold. We will get the former Prime Minister Benjamin Netanyahu's take on the escalating violence and how and if it will end.

And, up next, though: In the current Middle East crisis, do all roads lead to Iran and its radical and unpredictable president?

Stay with us. You are in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Welcome back.

Iran's president is blasting what he calls the Zionist invasion of Lebanon, and he is expressing support for the Lebanese people and their Syrian allies.

Our senior political analyst, Bill Schneider, joining us now with more on the Iranian connection to this current conflict in the Middle East -- Bill.

WILLIAM SCHNEIDER, CNN SENIOR POLITICAL ANALYST: Wolf, the Middle East crisis involves Israel, Lebanon, Hamas, and Hezbollah, and, many observers believe, Iran.

(BEGIN VIDEOTAPE) SCHNEIDER (voice-over): Do all roads lead to Tehran? In Iran, the government refuses to curtail its nuclear program. In Iraq, Iran has ties to Shiite militias. In Israel, Iran is suspected of being a player in the current crisis. The United States says so.

CONDOLEEZZA RICE, SECRETARY OF STATE: Iran is a principal funder and supporter of Hezbollah.

SCHNEIDER: The Israelis say so.

DANIEL AYALON, ISRAELI AMBASSADOR TO UNITED STATES: They want to see a Middle East which is under the influence of Iran.

SCHNEIDER: Israelis believe Hezbollah is trying to transfer the kidnapped Israeli soldiers to Iran. Since the Iraq war, Iran has become a more powerful player in the Middle East.

SHIBLEY TELHAMI, ANWAR SADAT PROFESSOR FOR PEACE AND DEVELOPMENT, UNIVERSITY OF MARYLAND: Iraq is not going to be a major power in any foreseeable future, no matter what happens militarily. So, Iran is the dominant power in the Gulf.

SCHNEIDER: Iran's influence in the Middle East has always been limited by the fact that Iranians are not Arabs. They are Persians and Shiites. They find a natural ally in Hezbollah, a radical Shiite group based in Lebanon.

SEN. JOHN MCCAIN (R), ARIZONA: The Iranians have nurtured Hezbollah and -- and helped them put all these rockets in place in Lebanon.

SCHNEIDER: For years, Iranians have tried to assert their leadership of the Palestinian cause.

TELHAMI: Iran, since the revolution, since Ayatollah Khamenei, has highlighted the question of Palestine, particularly the question of Jerusalem, as a -- as a Muslim issue.

SCHNEIDER: That's the danger. It may be working.

TELHAMI: Iran, which is not a natural ally, and certainly not one that Arabs have held as a model, is finding resonance in this environment.

(END VIDEOTAPE)

SCHNEIDER: It's also a big risk for Iran. Hezbollah could end up defeated or weakened. Many Arab governments do not want this war. And they resent the influence of Hezbollah and Iran in provoking it -- Wolf.

BLITZER: All right, Bill, good analysis. Thank you very much -- Bill Schneider reporting.

Coming up: We are keeping tabs on all the latest developments in the Middle East. We're going to have live reports at the top of the hour from across the region.

And a major legal and political story here in the United States -- the former CIA operative whose name was leaked to the news media is now suing the vice president and others. And now you are going to hear from her. She's speaking out.

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Middle East on the brink this hour with, Hezbollah's leader declaring what he calls open war on Israel.

And, in other new developments, Israeli jets destroyed Hezbollah headquarters in Beirut. And an Israeli warship is damaged by what appears to be a rocket, the Israelis say was lightly damaged.

Also, the Pentagon is developing scenarios for evacuating 25,000 U.S. citizens from Lebanon, if necessary.

Moving on to some other news, including a glimpse into the CIA leak controversy from the former operative whose cover was blown. Valerie Plame Wilson spoke out today with tough words for the Bush administration officials she's trying to hold legally responsible for what happened to her.

Our Brian Todd is following all of these developments from the newsroom -- Brian.

BRIAN TODD, CNN CORRESPONDENT: Wolf, a sweeping legal action, as you mentioned, and a dramatic public appearance today by the woman at the heart of that CIA leak scandal.

(BEGIN VIDEOTAPE)

TODD (voice-over): Three years to the day after a newspaper column revealed her classified identity, we hear former CIA operative Valerie Plame Wilson's voice for the first time...

VALERIE PLAME WILSON, FORMER CIA OPERATIVE: I and my former CIA colleagues trusted our government to protect us as we did our jobs.

SCHNEIDER: ... on why she is suing some of the most powerful people in the Bush White House.

PLAME WILSON: That a few reckless individuals within the current administration betrayed that trust has been a grave disappointment to every patriotic American.

SCHNEIDER: Wilson and her husband, former Ambassador Joe Wilson, accuse Vice President Dick Cheney, his former top aide, Lewis Scooter Libby, Deputy White House Chief of Staff Karl Rove, and 10 unnamed John Does of conspiring to destroy their careers. The suit claims, they did this after Joe Wilson wrote an op-ed piece questioning President Bush's case for the Iraq war.

PLAME WILSON: I would much rather be continuing my career as a public servant than be a plaintiff in a lawsuit.

SCHNEIDER: Representatives for Cheney and Libby won't comment on the lawsuit.

A spokesman for Rove says -- quote -- "The allegations are absolutely and utterly without merit."

Legal experts say the White House will fight hard not to get Cheney and the others deposed, out of concern sensitive information would get out. And, they say, the Wilsons have other hurdles.

JONATHAN TURLEY, CONSTITUTIONAL ATTORNEY, GEORGE WASHINGTON UNIVERSITY: Public officials come with a number of immunities and privileges that apply to their official conduct. You can lose those if you engage in unlawful conduct or you act with malicious intent, but it's a tough thing to prove.

(END VIDEOTAPE)

TODD: Tough to prove, tough to win damages, even if they do prove a conspiracy, according to our experts.

As to other legal matters involving these defendants, the Wilsons' attorneys say the prosecutor's decision not to indict Karl Rove played no part in this. And they say they don't want to interfere in the criminal case against Scooter Libby -- Wolf.

BLITZER: Brian Todd, thanks very much. You never know where these lawsuits are going to wind up. Just remember what happened to Bill Clinton when he faced a lawsuit as well.

Up next: With the Middle East boiling over, can Americans get out of the hot spots, if they need to? We will take a closer look at the Pentagon's backup plans -- more on our top story, that's coming up.

And are Republicans in jeopardy of losing control of Congress in November? Jack Cafferty going through your e-mail -- all that coming up.

(COMMERCIAL BREAK)

BLITZER: Here's a look at some of the "Hot Shots" coming in from our friends over at the Associated Press in the Middle East.

The West Bank: A Palestinian-American scuffles with an Israeli soldier, shortly after getting married. The wedding celebration took place during a protest against Israel's West Bank separation barrier.

Beirut: A Lebanese woman walks among the rubble, after an Israeli air raid took out a bridge.

Jerusalem: An Israeli cries at the funeral of Israeli soldier Nimrod Cohen. He was killed in Hezbollah's cross-border raid in which two other Israeli soldiers were kidnapped. And on the border of Lebanon and Syria, a massive traffic jam, as people try to flee Lebanon -- some of today's "Hot Shots," pictures often worth 1,000 words.

Let's go to CNN's Fredricka Whitfield. She's joining us with another close look at some other stories making news -- Fred.

WHITFIELD: Hello again, Wolf.

U.N. diplomats are, at this hour, working to hammer out differences over a Security Council resolution on North Korean missile testing. The U.S. and Japan are said to be pressing for a vote on a draft resolution calling for mandatory sanctions. Western diplomats say China has threatened to veto that draft. China has joined with Russia in proposing a rival resolution that does not include sanctions.

Unrest in Pakistan, after the death of a prominent Muslim cleric today -- a suicide bomber killed the Shiite cleric outside his home in the southern city of Karachi. After the attack, hundreds of the cleric's youthful supporters rioted, setting fire to a gas station and damaging shops and businesses. Authorities in Karachi say they have deployed extra police and paramilitary patrols at this hour.

Back in America this now, Massachusetts Governor Mitt Romney is taking over an inquiry into a major tunnel project in the state. Earlier this week, a woman was killed when a falling ceiling panel in one tunnel crushed the car she was riding in. Since then, more than 200 problem areas with ceiling bolts affixing the panels have been discovered.

And more legal setbacks for gay-marriage advocates -- in Nebraska, a federal appeals court reinstated a ban on same-sex marriage enacted by voters just six years ago. And, in Tennessee, the state Supreme Court threw out an attempt to block a ballot initiative, asking voters to outlaw gay marriage -- Wolf.

BLITZER: Fred, thank you.

Still to come here in THE SITUATION ROOM: the former prime minister of Israel, Benjamin Netanyahu, on his nation's new offensive against Hezbollah, as it fights to get its captured soldiers back.

And, here in the United States, the political battle for control of Congress -- are Republicans poised for defeat this fall? That's Jack Cafferty's question. He has your answers. That's coming up.

(COMMERCIAL BREAK)

BLITZER: Let's check back with Jack right now. He's got "The Cafferty File" -- Jack.

CAFFERTY: Wolf, a new AP-Ipsos poll shows, 68 percent of Americans think Congress is doing a lousy job. I am surprised the number is that low. Given the fact that both houses of Congress are now controlled by Republican, the question is, are they, Republicans, in jeopardy of losing control of the Congress in November?

Here's some of what you have written us.

Bryan in Galveston, Texas: "Even though I'm a conservative at heart, my vote will be against the incumbent, Republican or Democrat."

Andrew, Paramus, New Jersey: "Congress has surrendered its oversight role and has become a lapdog for the Bush White House. I predict the American people, deeply troubled by the actions of Bush/Cheney, will vote more for reining in an out-of-control White House than vote for the Democratic Party, per se."

Phil says: "No, I don't believe the Republicans will lose control of Congress or the Senate. First off, I think your prejudice makes the polls come out however you want them to. And, secondly, I think the big majority of people in this country know George Bush is really doing a good job."

Scott writes: "The ideal situation would be if the Republicans and Democrats would lose to some common-thinking independents, who would lead us in a much-needed new direction, and try to build our standing back up in the world."

Tom in Gastonia, North Carolina: "The clowns that currently inhabit the media are worse than the elected clowns. I would like to see a poll indicating how disgusted Americans are with the media. I bet the approval numbers would be a single digit."

And Rob in Cullen, Louisiana: "Jack, I hope the Republicans lose, and the Democrats don't win."

This weekend, on "IN THE MONEY," this tidy little business program we do: how Autobahn envy led to the construction of the nation's interstate highway system, which is turning 50 years old this year.

And are we being told the truth about the size of the federal budget deficit? Here's a hint: probably not.

"IN THE MONEY" airs Saturdays at 1:00, Sundays at 3:00, Eastern time. And we request that you be on time and dress appropriately -- Wolf.

BLITZER: Jack, thank you.

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