JERUSALEM, Jan 8 (Dan Williams/Reuters) - Israel will boost defense spending by about 6 percent this year in the face of deepening regional instability, Prime Minister Benjamin Netanyahu said on Sunday, defying calls for cuts as living standards are squeezed.

Israel will spend an additional 3 billion shekels ($780 million) on defense this year. The 2012 budget had been projected at around 50 billion shekels, broadly unchanged from last year.

Given the abundant challenges and threats surrounding us, it would be a mistake, a big mistake even, to cut the defense budget, Netanyahu told reporters.

Israel faces a strategic map that has been radically redrawn in the past 12 months.

It looks likely to lose regional alliances with Turkey and Egypt and faces a possible entente between the two main Palestinian factions, an uprising in neighboring Syria and growing fears over Iran's nuclear program.

Netanyahu said some of the money would come from trimming other government departments but savings from within the military would also play a part.

It will sell assets such army bases, prime real estate in some cases, and he also promised a more efficient use of the budget, to which the United States contributes $3 billion every year.

A panel formed last year in response to protests over the cost of living recommended that defense spending be cut by 2.5 billion shekels. That sparked a political fight between Treasury officials and national security chiefs.

Despite their apparent victory, defense officials were circumspect about the changes, saying they might only receive extra funding for this year and that they expected cuts to be imposed later.

The defense budget has been sharply and routinely decreased over the years, Defense Minister Ehud Barak said in a statement, noting that in 1986 the defense budget was 17 percent of GDP.

The 2011 defense budget was about 6 percent of GDP.

Cuts will bring the IDF (Israel Defense Forces) to a red line in everything to do, with capabilities, training and readiness to face the challenges before us, he said.

(1 shekel = $0.26) (Writing by Dan Williams; Editing by Ben Harding)