IMF: Israel can cope without US aid

"It is clear that the US aid will help, particularly in containing the fiscal deficit and stabilising the economy," IMF European Assistant Director Masahiko Takeda said.

"But the Finance Ministry is ready to cope with the situation without counting on US aid," he added.

Israel's economy has been battered by the global slowdown, hi-tech slump and a two-year Palestinian uprising that has scared off tourists, slashed revenues and sent defence costs soaring.

"We see considerable risk that revenue (next year) will fall short of the budgeted amount," the report said.

Israel is reportedly seeking $8bn (£5.1bn) in loan guarantees and $4bn in defence and other grants over 10 years from the US, the IMF's biggest shareholder.

Cutting interest rates

Israel is expected to overshoot its 3.9% budget deficit target substantially this year.

Mr Takeda said the government should address the causes of the deficit rather than relying on US aid to plug the gap.

In unusually direct advice to Israel's central bank, the Fund called on the Bank of Israel to use "every opportunity" to cut interest rates from 9.1%.

It also criticised what appeared to be a politically inspired 2 percentage point rate cut last December, which it said led to a sharp depreciation of the shekel, a surge in inflation and a threat to financial stability.

The IMF said it was confident the government was committed to pushing through the budget, due by 31 December, without compromising on spending cuts.

Disagreements about funding for Jewish settlements in the West Bank and Gaza Strip led to the dissolution of Prime Minister Ariel Sharon's government in November.

Elections are due to be held on 28 January.