Israel's prime minister is considering harsh measures to cope with the country's worsening economic crisis - so long as they include measures to boost growth as well as cap the budget deficit.

At a meeting with Finance Minister Silvan Shalom and senior Treasury officials on Thursday, Mr Sharon heard that January's surprise slump in tax receipts is unlikely to be a one-off, and worse is to come.

There was more bad news than the market could absorb Tal Vardi, Citibank

Earlier in the day, Israel's central bank governor David Klein had warned that the government risked losing control if it allowed the economy to deteriorate further.

"Economic and social deterioration cannot drift along on calm waters over time and the moment could come - and no one can estimate when or why exactly - when the government's very ability to govern will become questionable," Mr Klein told a business conference.

Currency dealers said Mr Klein's comments were responsible for a fall in the shekel, taking the currency close to its all-time low against the dollar.

"There was more bad news than the market could absorb," said Tal Vardi, vice-president at Citibank.

Sharp cuts

Government revenues have plunged and defence costs soared because of the 28-month-old Palestinian uprising.

January's shortfall was 2.7bn shekels, which if continued for most of this year would result in an annual deficit more than twice the government's worst case scenario.

Analysts and the central bank have called for up to 15bn shekels (�1.9bn; $3.1bn) to be cut from the budget so the government stays within its deficit target of 3% of gross domestic product.

"A government facing large debts does not have the option of increasing the deficit," Mr Klein said.

"It must reduce it, even during a period of recession."

The Central Bank has warned it will not reduce interest rates from 8.9% until the cuts are made.

The US government on Tuesday allocated $2.1bn in military and $600m in economic aid to Israel in its 2003 budget.

No government, no budget

Ariel Sharon's office said talks with the Bush administration officials for a further $12bn aid package have been postponed until next week.

No final budget can be passed until Mr Sharon builds a new coalition government, following elections in January, for which he is holding talks this week.

The centre-left Labour party walked out of Mr Sharon's last national unity government in October over a dispute about funding illegal settlements in the Occupied Territories.

So far, neither Labour nor Shinui - third placed in the elections - have agreed to join a new coalition government.

A Palestinian uprising against Israel's military occupation of the Occupied Territories has plunged the country into the worst economic crisis of its 55-year existence.

Tourism, a vital foreign currency earner, has slumped and Israel's hi-tech industry has stalled because of a slowdown in global demand.