As for Israel's economic situation, it should be remembered that little Israel continues to have an economy, as well as a military, considerably stronger than all of the neighboring Arab countries combined. But that's more a reflection of the great weakness of the Arab political and economic situations, not necessarily an indication of unlimited Israeli power to fully withstand the damage being done to its economy as well as its international image. The tourism and hotel industries are not just down; they are in deep depression. But at the end if toe day, as long as the Israeli/Jewish lobby remains powerful and the U.S. Congress remains compliant, it is likely the Israelis will continue to come out on top of every major battle -- even if at considerable cost to all parties including itself.

February 12, 2002 will probably be remembered as a day when both Israelis and Palestinians realized that their war of attrition had entered a new level of psychological stress.

The first sign was when the Israeli shekel sank to its lowest currency exchange level against the U.S. dollar, and the second sign was when Yasser Arafat came close to shooting one of his own generals Tuesday afternoon during a heated discussion inside Palestinian headquarters.

Arafat reportedly pulled his pistol and pointed it into the face of Jibril Rajoub, the man who heads counter-intelligence for the Palestinian Authority. The exact details of the event are skittish, and it was not reported in the Palestinian state media, but if fits a pattern of dramatic mood swings from Arafat who has been penned up inside his headquarters for weeks.

Only about ten days ago Arafat reportedly had a similar clash with Gaza counter-intelligence chief, Muhammad Dahlan, slapping him in the face in front of onlookers.

For Israeli policymakers, the signs of strain are less violent but no less dramatic: Prime Minister Ariel Sharon and Defense Minister Binyamin Ben-Eliezer barely spoke to each other in the last two weeks before and during their separate visits to the United States. It was clear that the two men, who head the Likud and Labor parties, respectively, were each trying to outstage the other during meetings with officials of the Bush Administration.

Ben-Eliezer tried so hard that he leaked sensitive conversations with Vice President Dick Cheney and National Security Advisor Condoleeza Rice, while Sharon got physically ill, got a fever and cut back on his official schedule.

Both men returned home to find that the Palestinians had launched "Qassam" rockets at Israeli communities, ignoring Israeli threats of reprisal.

But perhaps worse than the lack of Palestinian belief in official Israeli government pronouncements was the fact that Israeli public signaled its own disbelief in government policies by large movements of money from Israeli shekels into American dollars.

"The markets are very jittery," said Joseph Frankel, a manager in a Tel Aviv brokerage firm.

"(Israeli) Officials said the dollars would reach a certain level, and it has now gone much higher and people have lost their faith in official predictions," he said.

The shekel has been devalued by about six percent against the dollar in the last month, reaching a record level Tuesday of 4.78 shekels to the dollar.

The run on the dollar was only stymied by an announcement by David Klein, Governor of the Bank of Israel, that he would not hesitate to raise Israeli interest rates to stem the tide.

But raising interest rates in Israel is widely seen as a measure which would only deepen the Israeli recession which has been exacerbated the current warfare and the worldwide terror situation.

Only a few months ago, Israeli government economists were predicting four percent GNP growth, but most private economists believe that there will be negative growth in the current year.

>From their point of view, the Palestinians are trying hard to use psychological warfare against Israel, encouraging far-left Israeli fringe groups to refuse army service.

A group of about 50 Israeli army reservists, who have been financially backed by European Union supporters and small pro-Palestinian Israeli groups such as Gush Shalom (Peace Bloc) have issued statements calling for a refusal to serve in the West Bank or Gaza.

Yasser Abd-Rabbo, the PA cabinet official in charge of public relations, has made no secret of the Palestinian/European desire to inhibit Israel's military capacity.

"The European community has a clear position regarding the Israeli society," said Abd-Rabbo during an interview on the Voice of Palestine Tuesday.

"The position (of the Europeans)," continued Abd-Rabbo, "is that there is no security solution as Sharon thinks but only a political solution."

At the same time as Abd-Rabbo heads the Palestinian campaign to deter Israel from using full military force, he has also been leading a new campaign to boost the personal image of Yasser Arafat.

Truckloads of European and Palestinian supporters as well as Far-Left Israeli Jews and Israeli Arabs have been brought to Ramallah daily for much- photographed daily pep sessions with Arafat, who seems to draw strength from the effort at cheerleading the crowds outside his office.

But the crowds have been smaller than expected, and when Arafat goes back into his office he has little solace but to listen to the new radio jingles being broadcast on Voice of Palestine that extol his leadership as "ramz al-sha'ab al-filasteeni": "the symbol of the Palestinian people."

Yet as the strains of war rise on both sides, symbolism is wearing thin. [Media Line - 2/12/2002]

TEL AVIV, Feb 12 (Reuters) - The battered Israeli shekel (ILS-) slipped further against the dollar on Tuesday, continuing a month-long slide that is increasingly being seen as a vote of no-confidence in the government's economic policies.

The shekel has lost more than 10 percent since the Bank of Israel slashed its key interest rate by 2.0 percentage points in late December to an all-time low of 3.8 percent.

But the finger of blame is now being pointed at the government's weak fiscal policy and failure to respond to Israel's worst recession in nearly half a century.

"The Bank of Israel has a lot to answer for but what it has done is hurry a process that would have happened anyway," said Victor Shohet, Deutsche Bank vice president in Tel Aviv.

"Most of the blame is on fiscal policy. The currency is like equity, but instead of a share in a company it's a share in a country. The question on whether to hold the share depends on the underlying. Would you want to hold Israel at the moment? I think not."

The shekel weakened by 0.6 percent against the dollar on Tuesday as its month-long slide gathered steam, following last week's delayed passage of the 2002 budget.

In active midday trade the shekel fell as low as 4.775 against the dollar, compared with a representative rate of 4.744 on Monday, when the shekel fell 1.6 percent. Later it bounced back to trade at 4.745 against the dollar at 1122 GMT.

"The dollar is flying, there is buying all around," said Michael Rabinowitz, a senior dealer at Israel Discount Bank.

The dive in the shekel comes against the backdrop of a reeling Israeli economy that has been hit hard by a global economic downturn and a more than 16-month Palestinian uprising that has hurt exports and kept tourists away.

Gross domestic product is expected to grow by 0.5-2.0 percent in 2002 after a 0.5 percent decline in 2001.

Rabinowitz said rumours had circulated in the market on Monday that the Bank of Israel might raise interest rates to stem the shekel's fall.

"But at the end of the day commentators said there was no real reason to raise interest rates and this is having an effect of bringing more of the public into buying (dollars)," he said.

The shekel had remained strong against the dollar since the end of 1999, and its rapid descent has raised inflation fears since housing prices are linked to the U.S. currency.

Many economists now believe the central bank will have no choice but to put interest rates back up, perhaps by as much as one percentage point and perhaps as early as this month.

The market will be closely watching January's consumer price index, due to be released on Friday.

Inflation, which was just 1.4 percent in 2001, is seen rising to around three percent in 2002.

An interest rate rise is likely to give a temporary boost to the Israeli currency, economists say, as the rapid and sharp depreciation is seen as somewhat of an overshooting.

But in the long term the currency will be weak unless the government begins to deal with the country's economic problems and wins back credibility.

"At the moment Israel looks like it's in a big mess. It will run a big deficit this year and its debt will rise," Shohet said.

Economists forecast the budget deficit could reach five percent of GDP this year, compared with a government target of three percent.

Government debt could reach nearly 100 percent of GDP, compared with some 92 percent in 2000, though Shohet noted the shekel depreciation in itself will not have much of an effect since external debt is very low.

At the root of the problem is the 2002 budget, which Shohet called "a disaster."

"The revenue forecast is way out and as for priorities in the budget, I don't know if anyone even thought of that. There's nothing in it, there's no increase in infrastructure investment," he said.

Shohet's comments echoed those in Yedioth Ahronoth, Israel's leading daily, in front page headlines usually devoted to security news.

"No surveys are needed: the public is expressing out loud its negative opinion of the government's economic policy," the paper's financial commentator Sever Plocker wrote. "Citizens and investors have realised that this budget is not authentic, is not correct and is not credible.

"The Israeli government is increasingly perceived as a confused, embroiled, spineless entity, lacking direction, lacking answers and lacking credibility."