Israel's parliament, the Knesset, has passed an emergency finance bill as requested by Prime Minister Ariel Sharon.

The $2.7bn austerity package had been voted down on Monday, triggering a coalition crisis that has threatened Mr Sharon's national unity government.

Israel has overspent on the military budget

Members of the ultra-Orthodox Shas party, who refused to support the measure and who have been dismissed from the cabinet, absented themselves from the vote.

As Mr Sharon faced up to his domestic challenge, Israeli troops cut off movement of Palestinians between the northern and southern Gaza Strip and raided a West Bank village in a hunt for militants.

The army said it had blocked a main intersection in Gaza in response to mortar bomb attacks on Jewish settlements, while armoured vehicles drove into the village of Salfit in the West Bank to carry out house-to-house arrests.

Two Palestinians were killed by Israel forces in separate incidents in the West Bank, near Jenin and Bethlehem in the south, Israeli military sources said.

Gamble pays off

The austerity package of tax increases and welfare cuts is designed to help pay for Israel's military operations against the Palestinians.

Sharon's plan

6bn shekel ($1.25bn) spending cuts 3bn shekel ($625m) tax rises Public wage freezes 4% cut in social security payments

When it was opposed on Monday by Knesset members from Shas and the ultra-Orthodox United Torah Judaism (UTJ) party, Mr Sharon took a huge political gamble.

He sacked all cabinet and junior ministers from the two parties, signalling that he would not tolerate dissent within government ranks.

Under Israeli law, the cabinet dismissals come into effect after 48 hours - on Wednesday night - at which point Mr Sharon, with the support of only half the parliament, could find himself vulnerable to a no-confidence vote.

'No danger'

But the BBC's Jeremy Cooke says the vote in the Knesset means Mr Sharon has not only survived a potential political crisis; he has emerged from the turmoil with his personal power and credibility strengthened.

The question now is whether by not actively voting against the budget cuts, Shas has done enough to convince Mr Sharon that they should be invited back into the coalition government.

According to our correspondent, political sources are suggesting that the prime minister is reluctant to reverse his decision.

With Shas and UTJ out of the government, Mr Sharon's coalition would control just 60 of the 120 seats in parliament.

But at least one opposition party was expected to join Mr Sharon, and the government seems to be in no immediate danger of falling.

The chairman of Mr Sharon's coalition, Zeev Boim, said he was working to bring the centrist Shinui party and some members of the right-wing National Union into the coalition.

Shinui, a secular party, refuses to serve in a government alongside Shas.

Shas and the UTJ were trying to get special government subsidies for Orthodox religious students exempted from the austerity package.

The government has been warning that, unless the package was passed, Israel's budget deficit could rise from 3% to 6% which could affect the country's credit rating.