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Finance Minister Silvan Shalom, in Washington for a meeting of the International Monetary Fund, has told Ha'aretz that Israel's sovereign credit rating could be in danger of downgrading in the event of an American or international attack on Iraq.

Click here for the full interview.

Shalom's warning comes after a turbulent week on the Tel Aviv Stock Exchange and the Israeli forex market, on fears that leading international credit institutes were planning to downgrade the country's rating. Last week, the credit rating of two of Israel's leading banks were downgraded.

During his visit to Washington, the finance minister will meet with heads of international credit rating institutes, in an attemp to head of any possible downgrading.

PM: Israel will hit Iraq if our cities come under firePrime Minister Ariel Sharon said that Israel would respond to an Iraqi attack only if population centers are hit or non-conventional weapons are used by Iraq against Israel, in an interview to the Jerusalem Post that will be published Friday.

"If Iraq attacks Israel, but does not hit population centers or cause casualties, our interest will be to not make it hard on them [the U.S. and coalition partners]. If on the other hand Israel is harmed, if we suffer casualties or if non-conventional weapons of mass destruction are used against us, then definitely Israel will take the proper actions to defend its citizens," Sharon told the Jerusalem Post.

Ex-arms inspector: fear is that Israel will use nukes if hit by IraqFormer chief UN arms inspector Richard Butler said on Thursday his biggest fear was that Israel will be drawn into a war against Iraq and use its nuclear weapons.

If the United States and its allies wage war on Baghdad, Iraqi President Saddam Hussein could raise the stakes by attacking Israel, possibly igniting another Arab-Israeli war, Butler told a business conference in Hong Kong.

"The prime minister of Israel has said it will not be restrained, that it will respond (if Iraq attacks it)," Butler said.

"My deepest fear in that context, if that occurs and the war escalates, is that Israel will use its nuclear weapons.

"If that happens, the world would have been changed beyond recognition, and I would fear that if that happens the state of Israel would cease to exist."

Butler stressed repeatedly that he believed the rest of the world had every reason to bring Saddam back under the law and even remove him from office.

He dismissed Iraq's offer to allow the resumption of UN arms inspections as "a stalling tactic."

"That letter (to the UN) does not do the one thing that it was supposed to do, which was to give an absolute guarantee that if inspectors return to Iraq, they will be able to do their jobs unfettered," Butler said.

U.S. urges against Israeli response if Iraq attacks The United States will continue to urge Israel to hold its fire in a potential war with Iraq and believes the willingness to do so will depend on many factors, such as whether Saddam Hussein attacks with unconventional weapons, U.S. officials say.

The Bush administration, laying ground for a possible new conflict with Baghdad, has asked Israel in private talks to exercise the same restraint as during the 1991 Gulf War when it did not retaliate against attacks by 39 Iraqi Scud missiles.

"The Defense Department doesn't want anyone else in its airspace" in the event of a war, a senior U.S. official said. Israeli officials have replied that Israel reserved the right to strike back if the Iraqi leader launched Scud missiles at its cities in response to a possible U.S. military action. Foreign Minister Shimon Peres has said his country would coordinate its response with the United States.

U.S. officials told Reuters they did not consider Israel had made a final decision about retaliating and that Washington would discuss the issue with Israel further. "Their position is retaliation but it's subject to revision until the moment they take action," one U.S. official said.

"The decision will be affected by the conditions at the time -- by what kind of attack they sustain, what we are doing, what the level of regional cooperation" is by Arab states in any potential anti-Saddam operation, he said.

"My sense is that it's still early days in U.S.-Israel discussion. It's one thing to talk about it now when it's theoretical. It's another to talk as military action is unfolding," he added.

Britain published a dossier this week that reported Iraq could launch a chemical or biological weapon at 45 minutes' notice and produce nuclear weapons in one or two years if it obtained essential components from abroad.

Israel was pressured by the United States during the Gulf War not to rock an Arab coalition that supported the U.S.-led military campaign to oust Iraqi invasion forces from Kuwait. Peres said it was different now "because there is no Arab coalition" supporting a new U.S.-led attack on Iraq.

While Arab countries have voiced opposition to new military action against Iraq, many U.S. officials believe key Arab countries ultimately will side with Washington and provide logistical help and other assistance needed.

There are concerns that if Israel joined the fray with a retaliatory attack on Iraq, the Arab world would rise up against Israel, undermining the focus on Baghdad and increasing the risks to the Jewish state. U.S. officials say they understand the pressures Israel faces to defend its people and not look weak in a neighborhood of adversaries. Some Israelis believe their restraint a decade ago emboldened their enemies.

If Saddam were to attack Israel with chemical or biological weapons, instead of the conventional weapons he used in 1991, Israel may feel it has to retaliate, U.S. officials said.

But if Saddam attacks with conventional arms, Israel might be able to absorb the blow. In 1991, the Scud attacks produced relatively few Israeli casualties. With biological or chemical arms, the casualty figures could be much greater.

U.S. officials said there was a question about whether Iraq would even use its diminished Scud stockpile on Israel. Arms experts say Iraq may have several dozen Scuds. Unlike in 1991, when the goal was forcing Iraq's invading forces out of Kuwait, the goal of a new war would be to depose Saddam and he may decide he needs to use his arsenal against the United States, instead of Israel, U.S. officials said.

According to Prime Minister Ariel Sharon, the Bush team had promised that Israel would receive advance warning of any U.S. military action. The New York Times said Washington had told Israel it would mount an intensive campaign to destroy missile launchers in western Iraq with a range to hit Israel.