Labour walkout shatters Israeli coalition

Israel's coalition government collapsed yesterday when Ariel Sharon's main Labour party partners resigned, leaving the country in political confusion even as an American war on Iraq loomed and amid the Palestinian intifada.

Mr Sharon faces a choice between calling early elections or trying to struggle on with the support of the hard right, which would give him a tiny majority.

An alliance with the hard right would be bad news for the little that is left of the peace process because its members are even more opposed to compromise with the Palestinians than Mr Sharon. There could be months of uncertainty ahead.

A succession of ministers from the left-wing Labour party handed in their resignations to Mr Sharon yesterday, including the party leader, Binyamin Ben-Eliezer, the Defence Minister, and Shimon Peres, the Foreign Minister, one of the architects of the all-but-defunct Oslo peace accords.

By all accounts, Mr Peres left with regret. It was Mr Ben-Eliezer who insisted on leading his party out of government after three hours of crisis talks. Shouting was heard coming from the room where he was meeting Mr Sharon, and at one point the Labour leader stormed out in a rage.

At first sight, the dispute that prompted Mr Ben-Eliezer to quit the government, a disagreement over the spending of about 700m shekels (£95m) in the budget, seems slight. Mr Sharon even mocked him for it in a speech to the Knesset yesterday, saying: "For this you are breaking up the national unity government. Enough, there is a limit to contempt."

But what tore Mr Sharon's government apart were the Jewish settlements in the occupied territories, a subject that goes to the heart of the political divide. It is to these areas that the disputed 700m shekels will go.

Mr Ben-Eliezer had objected to the money going to the settlements in a budget that was cutting state funding elsewhere to pay the increasing costs of fighting the initifada. He demanded the money be diverted to the elderly and university students.

But Mr Sharon's supporters accused Mr Ben-Eliezer of breaking up the government for purely political reasons, because he is behind in the polls for the Labour leadership election, due in some three weeks. His rivals oppose staying in the government, and attacking the settlers plays well with Labour's core constituency.

The settlements are illegal under international law, because they are built on occupied land. Palestinians say they are a big obstacle to peace because they are built on the 22 per cent of mandated Palestine that is left to them. The settlers say that all the land in Israel and the occupied territories was given to them by God.

Mr Sharon is a keen supporter of the settlements. But the resentment towards the settlers among left-wingers is hard to overstate. Settlers get generous tax breaks and housing grants unavailable to ordinary Israelis. Many refuse to serve in the army for religious reasons. Meanwhile, the settlements are frontline targets for Palestinian militants and secular conscripts have to risk their lives to defend them.

Mr Sharon must now decide whether to ask the President for early elections. If he does, they must be held within 90 days. The polls indicate Mr Sharon's Likud party would come out on top, but first he will have to face a leadership contest, against the former prime minister Binyamin Netanyahu.

Mr Sharon said yesterday that he would continue to "lead the state responsibly". Ironically, the fateful budget was passed, despite Labour's exit from the government, with support from other parties.