Israel's fragile coalition government collapsed this evening following the resignation of Labour party members over the designation of government funds in the forthcoming austerity budget to Jewish settlements in the occupied territories of West Bank and Gaza.
The Labour foreign minister Mr Shimon Peres said that the ruling coalition's Labour ministers were to hand in letters of resignation, in a move which will almost certainly lead to snap elections.
The move follows this afternoon's resignation of the coalition's Labour party defence minister, Mr Binyamin Ben Eliezer after an afternoon of intensive talks with the country's hard-line prime minister Mr Ariel Sharon over the 2003 austerity budget.
The dispute is over the funding by the Israeli government of Jewish settlements in occupied Palestinian territories in the West Bank and Gaza.
The Israeli government has traditionally supported the settlements,which Palestinians and the UN view as illegal, to the tune of billions of dollars worth of aid.
The Labor Party joined forces with Mr Sharon's Likud Party in response to the Palestinian uprising, or Intifada.
In the case of a government collapse, Sharon's right-wing Likud Party could potentially form another coalition with other right-wing groups in the Knesset.
Additional reporting: Reuters, AFP