Prime Minister Ehud Olmert on Sunday rejected two demands by the defense establishment that would mean increasing the defense budget for 2007.

Olmert rejected demands to increase the base budget for the year by NIS 1.85 billion and to expedite to under three years the transfer of NIS 8.2 billion the Israel Defense Forces was promised for restoring its arsenal to pre-war levels.

Finance Ministry officials were increasingly confident Sunday that the government would approve the state budget tomorrow by a large majority.

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Olmert and his advisers met at his Jerusalem office with Defense Minister Amir Peretz, the director general of the Defense Ministry, the IDF chief of staff, his deputy, head of the planning directorate and head of the budgets division in the defense establishment.

Finance Minister Abraham Hirchson and his aides also attended the meeting, where it became clear that the treasury and defense establishment were in disagreement over the height of the base defense budget in shekels.

Olmert rejected that demand outright, repeatedly stressing that increasing the base budget for defense and transfering NIS 9.6 billion for war readiness would be discussed by a committee to be established shortly.

Senior Labor members are optimistic about their ministers voting for the budget tomorrow. Hirchson and his aides met Sunday with Labor's budget negotiators - ministers Shalom Simhon, Isaac Herzog and Eitan Cabel. Labor presented a series of demands concerning education, welfare services, pensioners and the Arab sector.

Hirchson underscored that the treasury could not acquiesce to everything, but Labor sources came away impressed by Hirchson's "good will."

Simhon said that Labor is demanding that the third phase regarding minimum wage, which the treasury wants to postpone to January 2008, take place in October or November 2007.

As for privatization of institutions for people with disabilities, if it turns out that the treasury is correct in claiming that the heads of these institutions themselves want them to be privatized, then Labor will drop the matter.

The main dispute between Labor and the treasury is a gap of NIS 300 million in the education budget.

The teams will meet this evening or tomorrow to iron out their differences before the cabinet vote late tomorrow night.

A senior Labor source said last night that ministers might back the vote even if talks with the treasury were not completed, so long as real progress had been made.

There were no talks Sunday between Hirchson and the other coalition partners. The treasury team will apparently hold meetings Monday with Shas and the Pensioners Party.

Treasury heads are also expected to meet Monday with Labor ministers who are demanding budget increases or have reservations about the structural changes the treasury is proposing for 2007.

Meanwhile, the Movement for Fighting Poverty in Israel, which focuses on providing pro bono legal services to the needy, petitioned the High Court of Justice Sunday to postpone the government budget vote to give ministers time to study the treasury's proposals, discuss these in depth and study alternatives that do not hurt the poor.

The organization's directors, attorneys Amit Mor and Guy Bagel, petitioned the court after receiving no response to their direct request last week to the ministers to delay the vote.

The social advocacy organization Adva Center also appealed to Olmert Sunday to find ways to pay for the war in Lebanon without burdening Israelis of little means.

The Israeli Center for Social Justice also wrote to Olmert, reminding him that his government's guidelines stipulated that it would work to reduce social gaps and provide an equal opportunity for every citizen, but that the 2007 budget continues the harsh cutbacks of recent years to allowances and social services.

The budget the government will vote on tomorrow does not include an additional NIS 150 million intended for Negev development.

The head of the Ramat Negev council, Shmulik Rifman, Sunday started a petition to demand that Vice Premier Shimon Peres, who is in charge of Negev development, oppose the budget unless the supplementary item is included.

As of Sunday, 19 council heads and civic leaders in the Negev had signed the petition.

Mijal Grinberg contributed to this story.