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A leading international credit ratings service said Thursday that Israel's economy has largely weathered the global meltdown, but warned the country's small size means robust growth hinges on developments abroad.

Moody's Investors Services, in its annual report on Israel, said the country's short-term prospects are relatively good. The outlook for its investment grade A1 government bond rating is stable.

The Bank of Israel raised interest rates on Monday, an indication it saw the worst effects of recession fading and inflation as a growing threat.

The Moody's report said Israel's strong credit rating was underpinned by the country's high levels of economic, institutional and financial strength, and added the recession now appears to be over for Israel.

It said the upbeat outlook reflected the absence of the main sources of the global crisis: toxic bank assets or a real estate bubble.

Israeli banks have traditionally been conservative lenders compared to their colleagues in the United States and Europe, shielding them from the worst of the global crunch.

The Moody's report said Israel's rating would be stronger if could resolve its conflict with the Palestinians and reduce its military spending, currently running at about $10 billion annually.

Renewed efforts to improve Israeli-Palestinian relations would be important validation of the country's A1 government ratings, it said.

U.S. government figures say Israel's military expenditure for 2008 was equal to 7.3 percent of its gross domestic product - one of the highest levels of military spending in the world.