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Encouraged by Israel's "sizzling" economic growth in the second quarter of 2005, Merrill Lynch raised its growth forecast for the year from 3.8 to 4.2 percent.

"Israeli economic growth surged at a higher-than-expected pace in the second quarter. Real GDP expanded at a 5.6 percent annual rate in the quarter after growing at a 3.9 percent pace in the first quarter [revised up from an initial estimate of 2.9 percent]," the investment bank wrote in its analysis.

Drivers of growth included consumer and government spending, which both increased by 5 percent and more in the second quarter, Merrill Lynch analysts Mehmet Simsek and Murat Ulgen wrote. Consumer spending surged 5.3 percent in the quarter, after a mere 0.4 percent in the first quarter, driven by low interest rates and strong employee growth, says the investment bank.

Tourism is recovering as the feeling of security is restored, and exports "were solid", rising 13 percent in the quarter, Merrill Lynch wrote. Imports soared 24.9 percent.

The data will serve Prime Minister Ariel Sharon well as he contends with former finance minister Benjamin Netanyahu's challenge after the disengagement, the investment bank suggests.

Federation of Chambers of Commerce president Uriel Lynn said that the trade and service industries had led first-quarter economic growth.

This growth, he said, came in the form of a 3.1 percent per capita increase, a 4.1 percent increase in private consumption, and 6.1 percent expansion of the business sector.

Commenting on Central Bureau of Statistics data, Lynn called the 9 percent increase in foreign trade an indicator that economic growth was replicating rates seen in 2004.

The CBS reported that exports to the United States and EU countries continued to rise in February-July 2005, as did imports from Asia.