The defence sector is a main employer in Israel

The Central Bureau of Statistics said the economy grew 1.3% across last year.

It followed a 2.6% rise in the final quarter, aided by the global economic recovery, and brings to an end two consecutive years of contraction.

Most analysts now expect the economy to go on growing in 2004, but warn the 1.3% annual figure is still too low for a country with 2% population growth.

Public sector

The statistics bureau said across the second half of 2003, the Israeli economy grew by 1.7%, thanks to a rise in private consumption and in exports and services.

Exports rose by 9.3% in the second half, nearly double the 5.1% increases seen between January and June.

The economic growth figures are something of a surprise, as they come after the government finally got parliament approval for an austerity budget on 8 January, after months of wrangling.

It is specifically aimed at restoring the Israeli economy to growth, and proposes cuts in welfare, health and education spending.

The public sector still accounts for about half the Israeli economy.