Defense Minister and Labor Chairman Amir Peretz was one of several leaders of coalition parties who on Sunday rejected the prime and finance ministers' demand that the parties cancel their requests for additional funds in the 2007 state budget, due to the cost of this summer's war in Lebanon.

Officials in the Prime Minister's Office are concerned that the budget will not pass by the target date of January 3 due to the brewing coalition crisis.

"We have a feeling that Peretz is trying to torpedo the coalition," said one official. "Maybe he thinks it would be better for him to enter the Labor primary from the opposition and not from the government."

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But Prime Minister Ehud Olmert said that he plans to bring the budget to a Knesset vote regardless. "What will be will be," he said.

The Knesset Finance Committee's vote on the Economic Arrangements Bill, which accompanies the budget, was due to be held Monday, but will apparently be delayed until Tuesday because, as of Sunday night, the coalition did not have the majority it needs to pass the bill in the finance committee.

Olmert convened the coalition party chairmen and the parties' faction leaders Sunday night to explain that due to the funds allocated to defense in the wake of the war - including a NIS 1.9 billion addition to the security budget - it was impossible to grant the coalition parties the budgets they had requested for civilian purposes. The meeting ran longer than expected and was very tense.

The plan for financing the enlarged security budget, which was unveiled during the meeting, entails cuts to the budget for the West Bank separation fence, a deferral of the plan to shorten compulsory military service, and an across-the-board cut of 2.5 percent in the budgets of all government ministries.

"We are not in a regular year," said Finance Minister Abraham Hirchson. "The fact that we did not encounter a financial crisis in the wake of the Lebanon war is because we acted responsibly. All the coalition parties must demonstrate national responsibility. We stretched the rope as far as it goes. We won't exceed the ceiling on budgetary expenditures. There are no financial reserves for distribution. Any addition will force us to increase the across-the-board cut beyond 2.5 percent and will paralyze the work of government ministries."

A special task force is set to meet with all the factions Monday to discuss their demands. Officials in the Prime Minister's Office said that Labor's demands alone came to an estimated NIS 2 billion.

Peretz threatened his party would vote against the budget if his demands are not met, but three ministers from his party have expressed their support for Olmert's position: National Infrastructures Minister Benjamin Ben-Eliezer, Construction Minister Yitzhak Herzog and Agriculture Minister Shalom Simchon.

The head of Labor's Knesset faction, MK Yoram Marciano, said that he would recommend that the faction stick to its primary demands: an additional NIS 250 million to rehabilitate distressed neighborhoods; an additional NIS 280 million for daycare centers; implementing the next stage of the minimum wage increase in July 2007, which will cost NIS 350 million; and raising old-age benefits to the level of the average salary.

Marciano caused a stir when he called Hirchson a "liar," saying that the finance minister had already agreed to meet Labor's demands and was now retracting his consent.

Hirchson said that the 2007 budget allocates NIS 3 billion more to social issues than the 2006 budget did.

Olmert said that the treasury will honor coalition agreements, but that the state does not have the money to give each coalition party additional funds, and he will not exceed the budget ceiling.