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Israel's banks have been making credit terms tougher for the faltering diamond sector. Most of Israel's big diamond merchants admit to a roughly 20% drop in sales last year compared with 2007, and say banks are tightening credit unless the merchants provide more collateral.

At its peak, credit to the diamond industry had been some $2.25 billion, say industry sources. In recent days banks have cut back credit by some $200 million, following a reduction of the a similar degree in previous months. And as activity in precious gems slows together with the world economy, the banks are expected to tighten credit lines even further.

The value of diamonds in world markets has been dropping. When a gem is offered for sale abroad, doesn't find a buyer and returns to Israel, its value is diminished. Since it is worth less, the merchant's banker will want more backing for credit, and if the merchant cannot provide more collateral, the bank immediately lowers his credit line, explain industry sources.

Data show that export of polished diamonds from Israel dived 60% in the fourth quarter of 2008 - the biggest quarterly drop the Israeli diamond sector has ever experienced. Worried industry leaders are now angling to get aid from the state, even though diamonds aren't normally perceived as being a sector in need.