Israel's Labor Party is poised to quit the country's ruling coalition in a row over the state budget, threatening to bring down Israeli Prime Minister Ariel Sharon's fragile government.

Officials from Mr Sharon's Likud Party and Labor are locked in talks to try to reach a compromise deal which will keep the government intact.

I call on the prime minister to sit down with me and to start working on an agreed date for elections

Binyamin Ben-Eliezer

Labor Party leader Binyamin Ben-Eliezer has warned he will quit the coalition if Mr Sharon does not divert millions of dollars earmarked for Jewish settlements in the West Bank and Gaza.

The withdrawal of Labor - Mr Sharon's largest coalition partner - would likely spell the end of Mr Sharon's 20-month-old "unity government" and trigger early elections.

The BBC's James Reynolds, who is at the Knesset (Israeli parliament) says it has been a day of classic Israeli coalition politics, involving crises, deal-making and brinkmanship

The vote on the budget - initially scheduled for Wednesday morning - was postponed for several hours as officials from both parties tried to hammer out a compromise deal.

"[The delay] gives new hope to find a solution so the national unity government will continue to function," Likud deputy and government chairman Ze'ev Boim told Israel radio.

Mr Ben-Eliezer wants Mr Sharon to divert $150m allocated in the budget for Jewish settlements to social spending and job creation instead.

Mr Sharon, a long-time supporter of the settlers, has rejected Labor's demand and has warned he will force out any party that votes against the budget.

No confidence

If Labor leaves the coalition, Mr Sharon's surviving minority government could fall in a vote of no confidence scheduled for Monday.

Ben-Eliezer wants more spending on jobs and social services

Mr Ben-Eliezer, who is also Mr Sharon's defence minister, suggested on Tuesday that he and Mr Sharon should begin talking about dates for an early general election next year.

"I call on the prime minister to sit down with me and to start working on an agreed date for elections," Mr Ben-Eliezer told Israeli television.

"We can agree on a date, around March, April, whenever he wants", he added.

Mr Sharon says he wants to keep the coalition in place.

He telephoned Mr Ben-Eliezer on Tuesday and praised him as a defence minister, saying he should stay in the government, Israeli television said.

Coalition building

Mr Sharon proposes spending cuts of $1.8bn - much of it from social services - to offset the high defence costs needed to combat the Palestinian uprising.

Correspondents say that if Labor leaves the coalition, Mr Sharon would appear to have the ability to cobble together a narrow majority based on small right-wing and religious parties.

But they say such a narrow government could prove unstable and unpopular, and the prime minister may have no choice but to call an election within 90 days.

A poll published in Israel's Yediot Ahronot newspaper says that if an election was held now, Labor would slide from 26 seats to 21 seats and Likud would rise from 19 to 29.