TEL AVIV, Aug 6 (Ari Rabinovitch/Reuters) - A quarter-million Israelis marched on Saturday for lower living costs in an escalating protest that has catapulted the economy onto the political agenda and put pressure on Prime Minister Benjamin Netanyahu.

Netanyahu planned to name a cabinet-level team on Sunday to address demands by the demonstrators, who in under a month have swollen from a cluster of student tent-squatters into a diffuse, countrywide mobilization of Israel's burdened middle class.

Israel projects growth of 4.8 percent this year at a time of economic stagnation in many Western countries, and has relatively low unemployment of 5.7 percent. But business cartels and wage disparities have kept many citizens from feeling the benefit.

The People Demand Social Justice read one of the march banners, which mostly eschewed partisan anti-government messages while confronting Netanyahu's free-market doctrines.

Police said at least 250,000 people took part in Saturday's march in Tel Aviv, Jerusalem and other cities, a greater turnout than at marches on the two previous weekends.

Demonstrations on such a scale in Israel -- population 7.7 million -- have usually been over issues of war and peace.

In a Peace Index poll conducted by two Israeli academics, around half of respondents said wage disparities -- among the widest of OECD countries -- should be the government's priority, while 18 percent cited the dearth of affordable housing.

Some 31 percent cited the stalled Middle East peace talks, Israel's international image, or the need to bolster the armed forces.

The demonstrations have upstaged Netanyahu's standoff with the Palestinians ahead of their bid to lobby for U.N. recognition of statehood next month. Protests also deflated his celebration of Israel's stability as citizen revolts rock surrounding Arab states across the Middle East and North Africa.

There has been nothing like this for decades -- all these people coming together, taking to the streets, demanding change. It's a revolution, said Baroch Oren, a 33-year-old protest leader.

The conservative coalition government has vowed to free up more state-owned land for development, build more low-rent housing and improve public transport. It also wants to lower dairy prices with more imports and boost medical staff numbers to address demands by striking doctors.

But the demands submitted by the National Union of Israeli Students go much further in calling for an expansion of free education and bigger government housing budgets.

Communications Minister Moshe Kahlon, named by a Netanyahu spokesman as a likely member of the cabinet troubleshooting team, said a solution was required even if it cost billions at a time when Israel is watching the debt jitters of the United States and parts of Europe. Israel's debt burden is 75 percent of GDP, lower than that of most major Western economies.

Interviewed by Israel Radio on Friday, Kahlon floated tax cuts and a breakup of cartels to benefit the middle class.

If anything, this demonstration is a demonstration of trust in Netanyahu -- though that may sound upside-down: 'Sir, we demand of you, we insist, you know how to, you are capable of fixing this,' Kahlon said, noting the lack of support for the centrist political opposition.

But he faulted Netanyahu and Finance Minister Yuval Steinitz for trumpeting Israel's macroeconomic indicators.

On the one hand we say we have a strong economy, on the other hand large groups of people are seeing that it is not reaching them. Hence the frustration and the outcry, he said. (Writing by Dan Williams; Editing by Kevin Liffey)