Transportation Minister Yisrael Katz said on Monday that he intends to privatize Israel Railways, after its workers union failed to reach an agreement with the state over the past two weeks.

"Israel Railways will be broken up into three subsidiaries, which will be set up together with the private sector," Katz said at a news conference in Tel Aviv on Monday.

Katz accused the Israel Railways workers union of sabotaging the negotiations and rejecting a compromise he had reached with the Histadrut labor federation.

But Histadrut chairman Ofer Eini denied having reached an agreement with the minister and charged Katz with sinking the negotiations by talking about privatizing or shutting down the railways in the midst of the talks.

Despite the dispute, on Monday, the workers union undertook not to disrupt train service in the near future.

"It is our duty to return the control over the railways to the public, and we cannot allow the train to be held hostage by a handful of workers," Katz said.

Katz said the idea of privatizing Israel Railways had the prime minister's full backing. The cabinet is due to decide on setting up three subsidiaries for the railways in the next two weeks.

According to the plan Katz outlined, Israel Railways will continue to operate the coaches and customer service, as well as the infrastructure for electric trains. This conflicts with the Finance Ministry's plan to set up a subsidiary for the electric trains.

"Three subsidiaries will be set up with the private sector - for maintenance, business, and real estate development and cargo," Katz said.

"This will start immediately and we start implementing the agreement with the Bombardier company today," Katz said, referring to the aerospace and transportation manufacturer that is supplying 150 new cars. "If the workers launch wildcat strikes I will not hesitate to shut the train down and reopen it."

The labor dispute focuses on the government's intent to outsource maintenance, initially by signing a contract with Bombardier to maintain the cars it is selling the railways over the next two years.

The labor court had given all the parties - the workers union, the Histadrut labor federation, the Finance Ministry and the Israel Railways management - two weeks, ending last weekend, to sort out their differences following several strikes.

Israel Railways chairman Uri Yogev said the maintenance agreement with Bombardier would be honored.

"The old mobile equipment will be handled by a subsidiary together with a private company and the new equipment will be outsourced," he said. "Within three months Bombardier's workers will handle the new coaches."

Shaul Meridor, deputy budget director at the Finance Ministry, told Haaretz "the government is determined to operate a reliable train service."

"Despite long, intensive negotiations, the workers did not agree to our far-reaching offers," he said.

Katz said the workers rejected his compromise because it would wrest some control from the union.

"It's simply a struggle for control," he said. "The union isn't interested in developing and improving the service, only in control."

Eini said he had never reached an agreement with Katz.

"In the past two weeks I held intensive talks with the train management and treasury officials," said Eini. "We made significant advances, but on no account did we reach an agreement, certainly not with the transportation minister. So all that talk about the union sabotaging some agreement is nonsense."

He accused Katz of attempting to sabotage negotiations.

"This is unprecedented in labor relations in recent years," Eini said. "Apparently Katz isn't looking for an agreement but for a battle with the workers. He wants to goad them to strike to make them look bad to the public and score points."

"The Histadrut isn't going to fall into this trap," said Eini. "Instead we will act responsibly for the passengers and workers' sake. I call on Katz to stop escalating labor relations and disrupting the train service. If he doesn't, he alone will be responsible for the consequences."

The workers union chairwoman, Gila Edrei, said on Monday the union would not agree to the treasury's last compromise proposal, consisting of a 25 percent pay rise, a NIS 40,000 grant to each worker and a commitment not to fire workers.

Activists of the summer's protest for social justice demonstrated outside the Transportation Ministry's Tel Aviv office during the news conference.

"The train belongs to the public and should remain that way," said Yossi Yona, one of several activists who petitioned the High Court of Justice to force the Transportation Ministry and Israel Railways to reveal the contract with Bombardier. "We call on the minister to suspend the railways' privatization, stop spreading lies about sabotaging the negotiations and start behaving like a responsible minister, rather than a novice businessman."