Israeli coalition in crisis over increased funding for settlers

Israel is facing a government crisis and the possibility of early elections amid the Palestinian intifada and with an American-led war against Iraq looming. The left-wing Labour Party is threatening to pull out of Ariel Sharon's coalition government, which could force early elections.

Urgent talks were reportedly under way yesterday to prevent such a crisis. Labour's leader, the Defence Minister, Binyamin Ben-Eliezer, is objecting to the proposed budget. But the substance of the row goes to the heart of the political divide in Israel; Mr Sharon's government could be brought down over the Jewish settlements in the Occupied Territories.

Mr Ben-Eliezer has picked his fight over some 700m shekels (£95m) of aid for settlers in the proposed budget. At a time when Israelis are being asked to tighten their belts as the cost of fighting the intifada mounts, Mr Ben-Eliezer is demanding this money should be redirected to pensioners and university students.

The US has called for an end to settlement-building as part of its peace plan. Palestinians say the settlements, built in contravention of international law on land occupied in 1967– the land on which they hope to make a Palestinian state – are one of the biggest obstacles to peace.

Under Mr Sharon, a known supporter, the settlements have continued to grow. But Mr Ben-Eliezer's core voters resent the settlers, who receive tax breaks and housing aid. Many settlers also refuse to serve in the army for religious reasons, infuriating secular Israelis who have to defend the settlements as part of their military service.

In recent weeks, Mr Ben-Eliezer has taken on settlers, ordering the army to evacuate illegal settlements by force and to demolish them. His opponents say this is because he is facing imminent primaries for the Labour leadership.

The dispute will come to its head tomorrow, when the Knesset is supposed to vote on the budget. If Labour leaves the government, Mr Sharon will either have to call new elections or form a new coalition with the hard right.