Prime Minister Ariel Sharon made a frantic last-minute effort Wednesday to save his crumbling coalition, trying to resolve a dispute with the Labor Party over the funding of Jewish settlements ahead of a budget vote. However, Labor leader Binyamin Ben-Eliezer said his party would bolt unless Sharon cut 145 million dlrs in allocations to settlements in the West Bank and Gaza Strip . Labor's departure would not topple Sharon immediately, but would force him to rely on small far-right parties or call early elections.

The crisis, the most serious in Sharon's 20 months in office, could hurt U.S. efforts to win support for a three-phase peace plan that envisions a provisional Palestinian state by 2003 and full independence by 2005.

Israeli elections would delay implementation and Sharon's far-right partners in a narrow coalition would likely object to many of the provisions, such as a settlement freeze and a significant Israeli troop pullback.

Developments on the Palestinian side also suggested the peace plan would run into problems. The proposal calls for sweeping reforms of the Palestinian government and the security services. However, the Palestinians signaled Tuesday that they would settle for more modest changes; parliament approved a new Cabinet that was largely unchanged, with only three new ministers.

The vote on Israel's 2003 draft budget was initially set for 11:30 a.m. (4:30 a.m EST) Wednesday, but was rescheduled for 4 p.m. (9 a.m. EST) to allow for negotiations. An aide to Ben-Eliezer later said the vote might not be held at all Wednesday.

Coalition chairman Zeev Boim of Sharon's Likud party said the delay raised hope the dispute could be resolved.

However, it appeared unlikely Sharon, a long-time champion of Jewish settlement expansion, would agree to Labor's demand.

Ben-Eliezer said he would not budge. "I am being pressured but I am telling you that I do not plan to change my mind if we don't get what we are demanding," he said.

Sharon and Ben-Eliezer met Wednesday morning with Israeli President Moshe Katsav who urged them to hold the coalition together.

Under a compromise being floated, allocations for pensioners and students, both key Labor constituencies, would be increased, while settlement funding would be reviewed, provided Labor supports the budget in the first vote. Two more readings are required after that to approve the spending plan.

Ben-Eliezer's critics have accused him of creating an artificial crisis. The sums at issue represent only 0.3 percent of overall spending. At the same time, Labor primaries are only three weeks away, and Ben-Eliezer is trailing two more dovish challengers. Leaving the government over a settlement dispute could boost his standing among dovish party members.

Labor joined forces with the hardline Sharon after he routed their candidate in prime ministerial elections. The party was widely expected to bolt the coalition before a scheduled November 2003 election to try to position itself as a moderate alternative to Sharon.

While the breakup of the coalition could lead to an election within 90 days, the political maneuvering could also drag on for months without resolution. Ben-Eliezer asked Sharon on Tuesday to begin talks on setting an election date, suggesting March or April as possibilities.

Israel's coalition governments are chronically unstable and plagued by internal fighting. No government has completed its full term since the 1980s, and the country has had five prime ministers in the past seven years.

PHOTO CAPTION

Israeli Labor Party leader and Defense Minister Binyamin Ben Eliezer speaks during an appearance at city hall with Mayor Gabi Naaman in the northern Israeli town of Shlomi Tuesday Oct. 29, 2002. Prime Minister Ariel Sharon will have no choice but to call an election within 90 days if the Labor Party votes against the 2003 state budget this week, as planned, the coalition chairman Zeev Boim said Tuesday. (AP Photo/Yaron Kaminsk