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Soon after President Reagan took office in 1981, he and his advisers decided that terrorists weren`t going to have the United States to kick around anymore.

When Col. Moammar Khadafy, Libya`s flamboyant and radical leader, sent hit squads around the world to kill dissidents and backed an invasion of Chad, Reagan slapped political and economic sanctions on the North African nation.

Five years later Khadafy would become the target of the administration`s first full-scale military attack against terrorism.

Although Reagan cut off American imports of Libyan crude oil, running at 700,000 barrels a day, the sanctions didn`t faze Libya`s oil industry, which accounts for the bulk of the nation`s gross national product and most of its merchandise exports.

Khadafy`s oil wells kept pumping 1.1 million barrels a day but instead of selling the crude oil to the U.S., Libya sold it to America`s allies in Western Europe, who were eager to buy.

Indeed, the sanctions actually had the opposite effect from what was intended–they strengthened Libya`s economic ties to Europe and hardened resistance to the U.S. goal of isolating Libya because of its support of terrorism.

That early experience with sanctions became a graphic example for the Reagan administration on the limited range of options it had for fighting international terrorism.

When Reagan first took office, his tough statements about dealing with terrorists looked good in headlines and sounded good on the evening news.

But when it came to tools that the U.S. actually could use to strike back, the new administration soon found out that backing words with deeds was no easy undertaking.

The terrorists, and the Khadafy government, seemed oblivious to the administration`s early counterterrorist menu of threats, revoked passports, closed embassies and one-way tickets home for the desert country`s diplomats. As terrorism became a critical problem in 1983, the administration learned that the United States military and intelligence agencies were inadequately prepared to deal with terrorists. Despite the movie scenarios of American secret agents conducting deft assassinations and daring commando rescues, administration policymakers found the intelligence agencies had severe liabilities.

American intelligence had only limited success in infiltrating the Palestine Liberation Organization and Middle East terrorist groups, and the CIA`s covert operations directorate was straining to conduct the thinly disguised secret war in Nicaragua.

The intelligence resources were ill-suited to tracking down skilled terrorists. Cooperation with European and other intelligence and police agencies was limited.

From the beginning a sophisticated international network of eavesdropping and satellite surveillance devices created by U.S. technology has served U.S. intelligence best.

Time and time again, it has proved the most valuable resource in coping with terrorism. It is this extraordinary advantage that enabled U.S. intelligence to begin to trace the international network of terrorists and the secret communications of the countries that support them.

But the hit-team, kidnap-squad tactics of the Mossad, Israel`s intelligence service, are denied to American intelligence by law, experience and lack of resources.

The Reagan administration also found few tools to fight terrorists in the $300 billion-a-year Defense Department. The American military structure, built to defend the nation in a global nuclear war, was unsuited for battling terrorists or fighting small wars.

Moreover, American military leaders in the early 1980s were hesitant to take on the job. Over the next four years, Defense Secretary Caspar Weinberger repeatedly would oppose the use of U.S. combat forces to strike back at terrorism because of the ”post-Vietnam syndrome,” a fear within the Pentagon that a show of military force would lead to a lengthy involvement, like the Vietnam War, that would soon lose public support.

”The military was burned badly in Vietnam,” said retired Adm. Daniel Murphy, who was chief of staff to Vice President George Bush during much of the time the nation was grappling with a policy on terrorism. ”They remember the reception we got after coming home from Vietnam and they are convinced not to try to use force when the people are not in favor of it.”

But the terrorist who drove the truckful of explosives into the Marine Corps headquarters in Lebanon in late 1983 and killed 241 U.S. servicemen made terrorism an issue that would force the Reagan administration to overcome these internal barriers.

Frustrated and angry at his inability to retaliate, Reagan ordered a sweeping review of America`s ability to counter terrorism. In April, 1984, the President, for the first time, received a ”complete scan” of the nation`s options, ranging from economic and political sanctions to military strikes.

A mobilized bureaucracy moved to increase security at U.S. Embassies, making them less accessible targets, and looked at ways to head off potential attacks, such as improving intelligence and bettering cooperation with allied police and intelligence services.

Secretary of State George Shultz named a blue ribbon panel, headed by former CIA Deputy Director Bobby Inman, to review the state of security for American diplomats abroad. In its final report, issued in April, 1985, the panel recommended major improvements in the State Department`s protective intelligence, threat analysis and alerting procedures.

Most dramatically, it found many American embassies were vulnerable to terrorist attack and urged that many be rebuilt or relocated to make them less-inviting targets. In response, the administration has asked Congress to fund a five-year, $4.4 billion program to upgrade diplomatic security abroad. Administration officials now suggest that the President and several of his key aides wanted to use military force from the earliest days and were skeptical that the nonviolent options would succeed in stopping terrorist attacks.

Thoughout 1984 and early 1985, the administration grappled with the difficulty of pinning blame for the terrorist attacks on one nation or group. ”There was frustration at not being able to pinpoint a target,” recalled John Hughes, former State Department spokesman.

At this stage, practically everyone opposed indiscriminate retaliatory strikes because the American public would not tolerate the casualties among innocent civilians.

”The innocent-bystander problem is an important one to the U.S. and its citizens, in a moral sense,” said Sen. Richard Lugar (R., Ind.), chairman of the Foreign Relations Committee.

Moreover, 1984 was an election year; a military mission that failed would be a catastrophe for a president seeking re-election.

In January, 1985, Reagan stepped up the sanctions against Libya from the level he had imposed in 1981, but again the Western European allies refused to go along.

In restrospect, the administration`s economic and political sanctions against nations that sponsor or assist terrorists were unrealistic and doomed to fail. It was a step long on symbolism but short on bite, especially when Western allies wouldn`t join in the effort.

Clement Miller, an oil analyst at Wharton Econometric Forecasting Associates, said there was little incentive for the Europeans to join the effort. Libyan crude oil has a high gravity, he said, making it ideal for refining into the more valuable fuels such as gasoline. Libyan oil also is the most economical feedstock for high-technology refineries being built in Europe.

There were other economic factors working against the sanctions, too. Mobil Oil Co. and Exxon, for example, left Libya partially because of U.S. pressure, Miller said, although their operations there had proved not to be particularly profitable.

Both had provided the Libyan government with crucial know-how needed to produce its crude oil. In their absence, other European oil companies–ENI of Italy and Veba Oil of West Germany–picked up the business and benefited from the situation.

By 1985, Miller said, Italy was producing 257,000 barrels of oil a day for the Libyans–trade that was worth $2.85 billion to Italy at official prices.

Libya now supplies one-fifth of Italy`s total crude-oil imports; one-sixth of West Germany`s requirements; one-third of Switzerland`s imports; 13 percent of Austria`s; and even 6 percent of the imports for the Netherlands, which borders the North Sea.

Moreover, even in its current depressed state, Miller said, the Libyan market ”represents one of the most active markets for European goods and services” that will undoubtedly improve once the slump in oil prices ends.

In 1984, Italy exported $1.66 billion worth of goods to Libya; Germany, $804 million; the United Kingdom, $328 million; and France, $212 million. Overall, European countries exported $4.3 billion worth of merchandise to Libya in 1984.

”Economic interrelations between Libya and Western Europe are reinforced by a two-way trade of goods, services and labor,” Miller said. ”Libya also has enough foreign exchange liquidity to partly satisfy its development ambitions and provide an employment-generating market for European contractors. These strong ties are the major reasons for the European nations` refusal to go along with U.S. economic sanctions against Libya.”

Despite repeated efforts to rally support for the sanctions, the U.S. was unable to forge an allied partnership to isolate Libya economically and politically, and the military option became increasingly attractive.

”It came after an exhaustive search for any support from anybody,”

Lugar argued.

The first call for military action came from Shultz. He began to urge Western nations to consider ”pre-emptive actions against known terrorist groups” soon after the Marine headquarters in Beirut was bombed.

In June, 1984, he made the first of two key speeches advocating a tough line on Middle East terrorism before Jewish groups, a key voting bloc that the administration also was courting for the November election.

Citing Iran, Syria and Libya as a ”league of terror,” Shultz then said terrorism was a ”threat to the democracies.”

”From a purely practical standpoint,” he said, ”a purely passive defense does not provide enough of a deterrent to terrorism and the states that sponsor it. It is time to think long and hard and seriously about more active means of defense–defense through appropriate preventive or pre-emptive actions against terrorist groups before they strike.”

On Oct. 25, 1984, Shultz stepped up his attack in a speech at the Park Avenue Synagogue in New York. He said the U.S. must be willing to retaliate against terrorists even though some ”innocent people” may die. ”We cannot allow ourselves to become a Hamlet of nations, worrying endlessly over whether and how to respond,” Shultz said.

He called for a ”broad public consensus on the moral and strategic necessity” of striking back at terrorists, whom he called ”depraved opponents of civilization itself.”

”A great nation cannot afford to be hamstrung by confusion and indecisiveness. Fighting terrorism will not be a clean or pleasant contest but we have no choice but to play it,” he said.

There was one big problem, though. Shultz`s call to arms was addressed to the Western allies of the U.S. but he couldn`t even get the U.S. Defense Department to go along.

Just more than a month after Shultz delivered his widely published

”Hamlet of Nations” speech, Weinberger, in what the Pentagon billed as a major speech, said U.S. forces should be committed to combat only as a last resort when vital U.S. national interests are at stake and when there is

”reasonable assurance of support by Congress and the public.”

Weinberger, who was well aware of the military`s shortcomings in dealing with terrorists, said the speech was designed to introduce a note of caution into the argument over sending U.S. troops into combat.

”Employing our forces almost indiscriminately and as a regular and customary part of our diplomatic efforts would surely plunge us headlong into the sort of domestic turmoil we experienced during the Vietnam War,” he said, ”without accomplishing the goal for which we committed our forces.”

The debate over the use of force continued into 1985 as various officials from all levels of the government joined in. It was both a legitimate disagreement on public policy and a major bureaucratic struggle.

Shultz and Weinberger had long been rivals from their Nixon administration days. After the Marine headquarters explosion, Shultz had tried to make the State Department the power center for the war on terrorism.

But he had no power to order U.S. forces into action or even deploy the forces that his policy of retaliation called for. That power lay with Ronald Reagan, and, by direction, Weinberger. Weinberger and the military leaders wanted Reagan to step in and take leadership as the commander-in-chief of the war on terrorism, which would place the direction of the crisis entirely in the White House.

This also meant that defeat in the war on terrorism would be laid at Reagan`s door and would unequivocally mar his presidency.

The debate itself also had the effect of a making a U.S. retaliatory military strike inevitable. One after another, terrorist acts were followed by an official U.S. statement promising retaliation. Each unfulfilled threat eroded American credibility.

”We talked too much,” one administration official said. The rhetoric not only eroded credibility among the terrorists, it raised and shattered expectations among the American people.

On Dec. 4, 1984, for example, a Kuwaiti airliner carrying 166 people, including 6 Americans, was hijacked to Tehran by four terrorists believed to be Lebanese who demanded the release of prisoners held by Kuwait.

Two U.S. Agency for International Development employees, Charles Hegna and William Stanford, were killed by the hijackers. U.S. officials concerned with the geopolitics of the situation easily could have played down the incident by claiming that the Americans merely were caught up in a fight not of their own making.

But Shultz, five days later, publicly attacked terrorism in a speech at Yeshiva University in New York and warned of the danger of not using military force ”when other means of influence have proven inadequate.”

He also hinted at the concern within parts of the administration over the public acceptability of a military reprisal, saying that there ”is no such thing as guaranteed public support in advance” when discussing the use of force.

While Shultz and Weinberger were jousting, CIA Director William Casey, acting with Reagan`s explicit authority, was trying to develop covert responses to terrorism. But the one venture that became public was

inauspicious.

In March, 1985, a Lebanese counterterrorist group allegedly linked to the CIA killed 80 people in Beirut with a car bomb but missed its intended target –a radical Shiite Moslem cleric. American officials denied that they had anything to do with the bombing but acknowledged that the CIA had trained some Lebanese in the Christian-dominated military intelligence service in covert counterterrorism techniques.

By this time, the U.S. officials who had publicly vowed to retaliate on several occasions found themselves with fewer and fewer options.

At this point, the White House jumped into the fray. Robert McFarlane, then the President`s national security adviser, told the National Strategy Information Center that the U.S. ”must be free to consider an armed strike against terrorists or those who support them when elimination or moderation does not appear feasible by other means.

”We need not insist on absolute evidence,” McFarlane said, adding:

”Nor should we need to prove beyond all reasonable doubt the tie between terrorists` actions and their supporters.”

A week later Reagan said the U.S. would ”go to the source” if foreign governments were found to sponsor terrorists acts. Meanwhile, press reports surfaced saying that the U.S. privately had warned Iran and Libya, two states that had been publicly identified as sponsoring terrorism, that they would be held responsible for any attacks on Americans.

The President and the White House had now become the power center in the war on terrorism.

But the attacks continued. On April 12, 1985, 18 people were killed and 82 were wounded, including 14 Americans, when a bomb destroyed a family restaurant in Madrid near an American air base. Islamic Jihad, radical fundamentalist Moslems believed to be trained and backed by members of Ayatollah Ruhollah Khomeini`s Iranian Revolutionary Guards, claimed responsibility for the attack.

Two months later, on June 14, TWA Flight No. 847 was hijacked by Shiite terrorists minutes after it took off from Athens International Airport. During the 17-day ordeal 145 passengers, including 104 Americans, were held hostage, and one American, Robert Stetham, a 23-year-old Navy diver, was murdered by the hijackers.

By the time the last hostage was released in Beirut on June 30, Reagan said the terrorists who hijacked the plane should be held accountable for Stetham`s death. Shultz vowed the U.S. would go after those guilty.

Behind the scenes, one senior White House official said, McFarlane had urged the President to order air strikes against terrorist bases in Lebanon, Iran and Syria in retaliation for the attacks.

But the President didn`t order the strikes, the senior official said, because of the difficulty in establishing precise responsibility for the hijacking and fears that large numbers of innocent civilians would be harmed. The official said the proposed air strike was backed by Shultz and Vice Adm. John Poindexter, then McFarlane`s deputy and now his successor as the President`s adviser on national security, but it was opposed by Weinberger and the Joint Chiefs of Staff.

Just days after the TWA hijack hostages were released, the President established the vice presidential task force that eventually authorized a poll suggesting that the public supported a military retaliatory strike against terrorists.

This special task force was the catalyst for marshaling a real war on terrorism. At almost the same time, Adm. William Crowe, commander of American forces in the Pacific, became the chairman of the Joint Chiefs of Staff to succeed Gen. John Vessey.

As a Navy officer Crowe had little identification with the war in Vietnam and many in the Pentagon believed he was selected and Vessey`s term cut short because he would be more willing to ”project American military power.”

Over the next several months, the administration kept up its verbal assault on terrorism, threatening ”appropriate action” against an array of isolated terrorist attacks throughout the world.

On Oct. 7, though, the course of events was dramatically changed when the Italian cruise ship Achille Lauro was hijacked by Palestinian terrorists. They killed and threw overboard a crippled 69-year-old American named Leon Klinghoffer.

The U.S. took action. After the terrorists had left the ship and were being flown to safety, U.S. Navy jets deftly intercepted the Egyptian airliner carrying them and forced it to land at Sigonella, Sicily, on Oct. 11.

They were seized there by Italian authorities, and five of the hijackers are now in custody. On Thursday, an appeals court in Genoa, Italy, overturned the conviction of the youngest gunman on grounds he was a minor at the time and reduced the sentences for two of the three other gunmen and a convicted accomplice. The young gunman will now stand trial as a juvenile, while his accomplices will serve terms ranging from 4 to 7 years in prison.

But Abul Abbas, the alleged mastermind of the attack, was allowed to go free.

U.S. officials subsequently obtained a complaint and arrest warrant charging Abbas with piracy, hostage taking and conspiracy. The U.S. also offered a reward of up to $250,000 for information leading to the apprehension of Abbas, who Italian authorities say is living now in Tunis.

The Reagan retaliation policy finally was taking shape. The administration had selected an action uniquely suited to its resources. U.S. electronic intelligence and information from Egyptians had pinpointed the escape aircraft.

American high-performance jets, using the latest in electronic search and targeting devices, had found the aircraft out of hundreds flying in the darkened sky over the Mediterranean and forced it to justice.

Tuesday: The Raid