The Bank of Israel said the Israeli government needed to make substantial cuts to the budget to reach its 2003 budget deficit target.

The bank added that the two-year uprising by the Palestinian people had affected the Israeli economy more than the global economic slowdown.

A substantial cut in ongoing expenses is needed Bank of Israel

The country's recession, which has lasted more than two years, has hit tax revenues, while unrest has prompted a rise in defence spending.

The Bank of Israel was critical about tactics used by the Finance Ministry last year which enabled it to meet its 2002 deficit target.

2003 budget in trouble

"To reach the (2002) deficit target, among other things, short-term steps were taken, such as delaying payments to suppliers and tax refunds that are likely to weigh heavily on the 2003 budget," the bank said.

The deficit for 2002 was 3.97% of gross domestic product compared with a 3.9% target set out earlier.

But with the Palestinian uprising and booming defence costs, analysts had expected the deficit to reach 4.5%.

Analysts subsequently accused the ministry of "creative accounting".

Hitting the 2002 deficit target was important for the government because it was a key requirement in keeping international credit rating agencies from lowering Israel's sovereign credit rating.

For this year, the Bank of Israel said "a substantial cut in ongoing expenses is needed" to reach the 3% deficit target.

In order to meet that target, analysts said the budget would need to be cut by up to 15bn shekels ($3.1bn).

But last week, a Finance Ministry source told Reuters news agency that the government was planning cuts of 7bn-10bn shekels.