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MIDDLE EASTThe Iranian-backed Islamic Jihad said yesterday they were freeing British hostage Terry Waite and American Thomas Sutherland. Their note to a news agency in Beirut was accompanied by an old black-and-white photograph of American hostage Terry Anderson. Hard-line Housing Minister Ariel Sharon, the principal architect of extensive Jewish settlements in Arab territories occupied by Israel, has said all such building work might be suspended because of a cash crisis. He said the step might be taken after Prim e Minister Yitzhak Shamir returns toward the end of the month from a trip to the US.... Britain made a formal request Sunday for Libya to extradite two men charged with bombing a Pan Am jumbo jet over Scotland in 1988, a diplomat in Tripoli said.... UN chemical and biological weapons experts left Bahrain for Iraq again yesterday to search for evidence of weapons of mass destruction Iraq might be concealing. The UN suspects Baghdad may still have concealed sites for the development and production of biologic al weapons. UNITED STATES A survey reported Sunday Americans overwhelmingly believe families are critical in teaching values and that belief has grown stronger over the past two years. Sponsored by the Massachusetts Mutual Life Insurance Company, the study showed 97 percent of the people polled agreed that values are taught more in the home than in church or school. The values learned most at home were responsibility, respect for others, and the importance of emotional connectedness.... A top-secret US agency designed to ensure t he survival of a civilian constitutional government in the US in the event of a nuclear war is riddled with fraud and abuse, CNN reported Sunday. In an hour-long documentary, the network said the clandestine National Program Office, nicknamed the Doomsday project, was set up by former President Reagan in 1982. It is headed by Vice President Dan Quayle and has spent $8 billion, mostly on high-tech communications gear, since 1982, it said.

EUROPE Fighting has escalated in the ethnically troubled Caucasus Mountains, and Cossacks warned they will leap into the fray unless Soviet and Russian leaders bring peace to the region. The fighting between Ossetians and Georgians threatens to tear apart the region where more than a dozen ethnic groups live in overlapping territories. The region of North Ossetia is setting up its own national guard because it says it has been threatened by the breakaway republic of Checheno-Ingushetia.

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ASIA AND THE PACIFIC China angrily denied yesterday that it had arrested dissident journalist Dai Qing, but reports that she was held to stop her meeting with Secretary of State James Baker III have overshadowed the modest gains of his visit.

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