By Mark Hosenball
WASHINGTON (Reuters) - National security officials say progress is being made to persuade Pakistan to free a CIA contractor held on murder charges but that Washington could take punitive diplomatic and financial action if the case is not resolved soon.
The officials said they believed private discussions between Islamabad and Washington have cooled anti-American rhetoric that erupted in Pakistan after the arrest of Raymond Davis, a former U.S. special forces soldier employed by the CIA as a bodyguard for its operations officers.
His arrest put grave strains on ties between U.S. and Pakistani intelligence agencies, who have had an uneasy but sometimes productive partnership combating militants based in tribal areas along Pakistan's border with Afghanistan.
Last week, CIA Director Leon Panetta raised the Davis case with his Pakistani counterpart General Ahmed Pasha, head of the Inter Services Intelligence directorate.
Secretary of State Hillary Clinton and Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, also talked about Davis with top Pakistani officials.
The U.S. message, according to a senior official in Washington, was "turn down the volume" of public discussion about Davis and "work through private channels."
U.S. officials believe the public uproar in Pakistan over Davis has subsided enough to allow productive dialogue about devising a way to free him. David has been held in Lahore since January after he allegedly shot dead two men who he says were trying to rob him at gunpoint.
But several officials told Reuters of detailed discussions within President Barack Obama's administration about coercive measures being considered if Pakistan does not free Davis because, according to Washington, he has diplomatic immunity.
The punitive steps could include slowing disbursements of U.S. aid to Pakistan and the issuing of U.S. entry visas to Pakistanis, an official said.
A more distant possibility, the official said, would be to declare some Pakistani diplomats "persona non grata" and expel them from the United States.
ROOM FOR FLEXIBILITY
Two U.S. officials stressed that Washington was not close to being ready to impose any of these sanctions, adding that the pace would ultimately be dictated by events in Pakistan.
"If this looks like it is headed toward a point of no return then a decision will be made to pressure them," one of the officials said.
But punitive steps will likely remain on hold, the official said, if Davis stayed in good health, continued to be segregated from other detainees in the jail and there appeared to be a possibility of securing his release.
"As long as it remains where it is, in stasis, people will leave flexibility," the official told Reuters.
Other U.S. officials said Pakistani authorities recently made significant efforts to improve security around Davis.
On Thursday, a court in Lahore adjourned Davis' scheduled trial until next week. The United States has retained a retired judge and former government prosecutor, Zahid Hussain Bokhari, to help with Davis' defense.
While tensions have eased, U.S. officials warned that little progress had been made in devising a diplomatic formula under which Pakistan might be able to release Davis.
Some Pakistani officials have been quoted as saying they would like Washington to do more to identify U.S. government contractors sent into Pakistan. But a U.S. official said that, as of earlier this week, Pakistan had yet to request such disclosures through official channels.
(Additional reporting by Mubasher Bokhari in Lahore and Arshad Mohammed in Washington; Editing by John O'Callaghan and Paul Simao)