Prime Minister Ehud Olmert has decided to appoint Interior Minister Roni Bar-On as finance minister, sources in the Prime Minister's Bureau said Sunday.

Finance Minister Avraham Hirchson, who suspended himself due to an ongoing police investigation into graft allegations, announced Sunday that he is resigning over the probe.

Bar-On, who has served in the Interior Ministry post for the past year, has no economic experience.

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Bar-On intends to bring Interior Ministry Director General Ram Belinkov with him to the Finance Ministry, although it is still unclear what position he will fill. Belinkov previously served in the ministry's budgets department.

Belinkov is interested in serving as accountant general, but position currently filled by Yaron Zelekha. Budgets Director is set to step down in the near future, meaning that position would be readily available for Belinkov. Bar-On himself would like to see Belinkov take over as the ministry's director general, but its current director general, Yarom Ariav, took over in January this year and is well respected.

In a detailed letter of resignation, Hirchson said he wished to devote his time and effort to clearing his name and proving his innocence.

"Under the circumstances and despite being able to continue in office, it is appropriate to appoint a new finance minister to devote his entire time to leading the Israeli market," he wrote.

"Hirschson believes in his innocence - and I believe in his innocence - and this move will allow him to better deal with what lay ahead," said Prime Minister Ehud Olmert, who is a close friend of Hirchson.

"I thank him for his service for the government."

Sources close to Olmert said the prime minister does not want to risk another controversial appointment that would trigger petitions to the High Court of Justice, thereby turning down the candidacy of MK Haim Ramon, who was convicted of kissing a female IDF soldier against her will.

Labor Party chief and Defense Minister Ehud Barak has also indicated he would prefer that Ramon not be appointed finance minister or given a portfolio requiring work with Barak because of the tense relations between the two.

Former finance minister Meir Sheetrit of Kadima sees himself as the most suitable candidate. Olmert fears, however, that Sheetrit would be too independent, while he is confident of good cooperation with either Ramon or Bar-On.

The prime minister admires Ramon and wants to give him a central role in the cabinet. he has been advised to create a senior portfolio for Ramon and add him to the security cabinet, rather than place him at the treasury.

Olmert will continue the cabinet reshuffle by appointing a new head for the Negev and Galilee Development Ministry, to replace President-elect Shimon Peres. Olmert will also choose a minister to replace Bar-On or Sheetrit, should one of them become finance minister.

Barak, for his part, will have to decide which Labor member to appoint minister to replace Labor secretary general Eitan Cabel, the minister without portfolio in charge of the Broadcasting Authority who resigned some weeks ago.

MK Amir Peretz, Barak's predecessor as defense minister and Labor leader, has turned down the post. If MK Ami Ayalon also rejects it, Barak could offer the position to one of his supporters, MKs Matan Vilnai and Danny Yatom. Barak must also appoint a deputy defense minister now that MK Ephraim Sneh was forced to resign following Peretz's resignation.