JERUSALEM, June 7 (Reuters/Ari Rabinovitch and Joseph Nasr) - The Gaza flotilla crisis between Israel and Turkey could disrupt a $3 billion trade channel that has been central to their once-strong alliance, Israeli and Turkish officials said on Monday.

Israeli industry leaders have called for trade to continue as normal despite protests over Israel's lethal interception of a Turkish-flagged aid ship in a convoy that set out to challenge a blockade of the Gaza Strip. Israel said its commandos acted in self-defence when attacked by pro-Palestinian activists.

Israeli Industry and Trade Minister Binyamin Ben-Eliezer said he hoped economic ties would stay removed from the political tension, but added: We have to be realistic.

He told Reuters he could not see how two recent water and energy projects could continue right now, in the near future.

But he voiced confidence that Turkish and Israeli companies were still interested in doing business. Turkey has been a rare Muslim ally for Israel and its tenth largest trading partner.

The countries also have close military ties. Turkey's defence minister said last week a $180 million deal for Israeli-made Heron drones will not be affected by the tensions.

However, Turkish Foreign Minister Ahmet Davutoglu said on Monday Israel would have to agree to an international inquiry before military cooperation could continue. Israel on Sunday rejected a U.N. proposal for an international investigation.

Ben-Eliezer said scenes of Turkish protesters burning Israeli flags after the flotilla interception were putting Israelis off visiting Turkey, a favourite holiday destination.

The Israel Travel Agents' Association said about 100,000 of the 150,000 Israelis who had planned vacations in Turkey this summer have cancelled. Even tourists who had planned to fly to other destinations via Turkey have asked to fly through other countries, said Yossi Fatael, the group's director.

Turkish Airlines could suffer from the crisis. It had been the fastest-growing airline in Israel and flew more passengers in and out than any other foreign carrier.

Israeli-Turkish trade peaked in 2008 at $3.5 billion, but slipped some 28 percent in 2009 during the global financial crisis. Trade in the first quarter of 2010 rose by 24 percent compared with the same period in 2009 and totalled $753 million.

Israel buys more from Turkey than it sells, said the Israel Export and International Cooperation Institute. Its biggest export to Turkey is chemical products, and the largest import is base metals.

Organisers of a Cleantech convention in Tel Aviv this month, a field that has benefited from Israeli-Turkish cooperation, said five Turkish firms had cancelled their participation.

Israel's largest oil refinery, Oil Refineries, said it expects sales in Turkey of fuel products and petrochemicals to account for 7 percent to 9 percent of its total sales in 2010, but had alternative markets for these products.