Did businessman David Appel loan more than $500,000 in cash to a senior civil servant, the outgoing director of the Mifal Hapayis national lottery? Or is the entire story an invention of Appel's fevered brain? It depends who you believe.

About a year ago, Appel's lawyer sent a letter to Mifal Hapayis Director General Shaul Sutnik stating that in 2006, Sutnik asked Appel for a large amount of cash, Haaretz found. Appel claims that he indeed provided the cash, in two tranches - one of $250,000 and one of 250,000 euros. One tranche was handed over at the Sheraton City Tower Hotel in Tel Aviv and the other at Appel's house.

According to the letter, this money was intended as a loan, even though nothing was put into writing. Witnesses observed the money transfer, it adds.

Appel was once one of Israel's most politically well-connected businessmen. He was convicted more than a year ago of bribing various public officials and sentenced to three years in jail, but the sentence was deferred until a ruling can be issued on his appeal, which is currently before the Tel Aviv District Court.

His involvement with Sutnik dates back to 2005, when Appel was promoting a grandiose tourist enterprise in Italy and wanted Mifal Hapayis to play a role. The project entailed setting up a futuristic holiday village near the small, unemployment-stricken town of Crotone, located on Italy's southern coast. The village would comprise streets of hotels set in a luxuriant forest, along with huge fountains, auditoriums, a soccer stadium and malls, all sprawling over an area of some 13,000 dunams - twice the size of Ramat Gan.

Appel recruited several well-known Israelis to the project. Former Knesset Speaker Avraham Burg chaired the company in charge, called Europaradiso; Amos Malka, a former Military Intelligence head, was its security consultant; game show host and actor Zvika Hadar narrated the promotional film, which was produced by Ron Assouline; and the project's legal advisor was Prof. Ron Shapira, a former dean of Bar-Ilan University's law school.

What Appel wanted from Mifal Hapayis was to buy 30,000 lottery subscriptions over five years. The subscriptions would then be handed out as perks to Europaradiso customers.

Appel met with Sutnik, a long-time acquaintance, several times to discuss this proposal, but it never advanced because the Italian venture remained an unrealized fantasy: The land on which Appel hoped to build the village was declared a special preservation zone, and his efforts to get it rezoned failed. Still, Appel didn't give up easily: In late 2008, he was still declaring that Europaradiso was on the verge of completing the project planning, and that he hoped construction would begin soon.

That was where things remained until December 2010, when Appel's lawyer, Israel Shalev, suddenly sent a letter to Sutnik demanding that the two enormous cash "loans" be repaid. The letter stated that Sutnik had asked Appel for a NIS 2.5 million loan on the basis of their long acquaintance, and had insisted that the money be delivered in cash. It also claimed that Appel had asked Sutnik to repay the loan, with interest, many times before, but that Sutnik kept asking for more time.

In response to this letter, Sutnik sent a terse reply in which he flatly denied ever having received any money from Appel and called Appel's claim "delusional."

"I understand that your client is in a difficult situation these days, including financially, and I'm sorry about it," Sutnik wrote to Shalev. "But I never dreamed that this would lead your client to make up fantasy stories."

A few months ago, Appel transferred the alleged loan to a company named Hermesh Legal Services, and a few weeks ago, Hermesh also wrote to Sutnik. In its letter, the company said it has affidavits attesting to the huge cash transfer from the businessman to the senior civil servant.

The parties' attorneys have met several times over the past few months, but have not reached an agreement, Haaretz has learned.

A source familiar with the details of the case termed it a "Pandora's box" that would generate shock waves if opened.

"Why would Appel simply make up a story that he loaned hundreds of thousands of dollars in cash to the director of the national lottery?" the source asked. "Why didn't he come to you or me with a similar demand?"

But Sutnik reiterated his denial to Haaretz, both orally and in writing. "This is a completely delusional story," he wrote in response. "Mifal Hapayis and Shaul Sutnik filed a complaint with the police. We do not intend to discuss the details of the complaint."

Sutnik has served as director general of Mifal Hapayis - one of the country's most powerful positions - for the last 10 years. Born in Brazil, where he completed his bachelor's degree in economics, he moved to Israel in 1967. He joined Mifal Hapayis more than 20 years ago, following a stint at the Jewish Agency, and became its director general in 2002.

A month ago, he announced his resignation, and it is due to take effect in another few weeks. He is then slated to become director general of a Mifal Hapayis subsidiary, Payis Motzrim.