Oil/gas rig - AP - Sept. 17, 2010
An oil rig (illustrative) Photo by AP

Finance Minister Yuval Steinitz has dropped a proposal to hike royalties paid by Noble Energy, an American company developing natural gas fields off Israel's Mediterranean coast, instead cancelling tax incentives.

The proposed royalty hike from 12.5 percent to 25 percent threatened to create tension between Israel and its most important ally.

Steinitz told a news conference Wednesday that instead of hiking royalties, he's recommending canceling a 27.5 percent tax incentive the companies enjoy. They would be taxed on a sliding scale depending on levels of investment.

Steinitz said the huge gas fields are the biggest and most significant natural resource in Israel's history.

Noble Energy officials were not available for comment.