The head of the Egyptian Natural Gas Holding Company has said it has terminated its contract to ship gas to Israel because of violations of contractual obligations, a decision Israel said overshadows the peace agreement between the two countries.

Mohamed Shoeb, the gas company's top official, said Sunday's decision was not political. This has nothing to do with anything outside of the commercial relations,'' Shoeb said.

He said Israel has not paid for its gas in four months. Yigal Palmor, Israeli foreign ministry spokesman, denied the claim of not paying.

The 2005 Egypt-Israel gas deal has come under strident criticism from leaders of the popular uprising that toppled Hosni Mubarak, the longtime Egyptian president, last year.

Critics charge that Israel got bargain prices, and Mubarak cronies skimmed millions of dollars off the proceeds.

'Bad faith'

The sale of gas to Israel, which signed a peace treaty with Egypt in 1979, has always been controversial in the Arab world's most populous country. It was the largest trade deal between the two former foes.

Egyptian militants have blown up the gas pipeline to Israel 14 times since the uprising.

On Sunday, Israel Finance Minister Yuval Steinitz said the unilateral Egyptian announcement was of "great concern'' politically and economically.

"This is a dangerous precedent that overshadows the peace agreements and the peaceful atmosphere between Israel and Egypt,'' he said in a statement.

Israel relies on Egyptian natural gas for 40 per cent of its supplies to produce electricity, the chairman of a government holding firm said on Sunday.

The Israeli side said the decision was "unlawful and in bad faith", accusing the Egyptian side of failing to supply the gas quantities it is owed. The dispute is under international arbitration.

Israel insists it is paying a fair price for the gas.

Al Jazeera's Mike Hanna, reporting from Cairo, said the row will have major political consequences.

"At the base of it, this is a commercial dispute, which has in reality been under international arbitration since September last year," he said.

"But when this agreement was reached in 2005, it was subject to government approvals of Israel and Egypt, many believe under pressure from the government of the US.

"So although this maybe a commercial situation at the moment, this is an issue that will have immense political, international fallout in the days to come."

Mubarak defended

In January, a lawyer defending Mubarak told a Cairo court that there was not a shred of evidence linking the ousted Egyptian president to the controversial gas deal.

Farid al-Deeb said Egypt's spy agency negotiated the deal in line with international norms.

"There isn't an ounce of evidence that Mubarak was involved in the deal to import gas to Israel," costing the state $714m in losses, Deeb told the court.

Among the shareholders of East Mediterranean, the joint Egyptian-Israeli company that carries the gas to Israel, is Hussein Salem, a close friend of Mubarak.

After the many disruptions to the supply of gas over the past year, Israeli ministers have urged the speedy exploitation of recently discovered gas fields off the country's northern coast.

Israeli officials believe that exploitation of two major natural gas fields could compensate for the loss of Egyptian gas.

Israel has already moved to begin exploiting the fields, signing a deal with Cyprus to mark out maritime borders, but it faces challenges from Lebanon, which claims that the gas fields lie in its territorial waters.

PHOTO CAPTION

Israel and Egypt signed a peace treaty in 1979, but already poor relations had worsened over the gas deal [Reuters]

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