JERUSALEM, June 30 (Steven Scheer, Reuters) - The United States has re-approved its Israel loan guarantees program, subject to meeting fiscal targets, Israel's Finance Ministry said on Tuesday.

The move comes amid the most serious rift between Israel and its main ally in more than a decade due to disagreements over Jewish settlement building in the West Bank, land Palestinians seek for a future state.

Re-approval of the loan guarantees shows significant faith in Israel's economy by the U.S. government, Yarom Ariav, the Finance Ministry's director-general, said in a statement after signing the agreement.

Earlier in the decade, to help Israel deal with a recession caused by a global downturn and a wave of Palestinian suicide bombings, the U.S. in 2002 provided a package of $9 billion in loan guarantees, where Israel could sell bonds internationally with the backing of the United States.

The guarantees have been instrumental in sovereign ratings upgrades by credit ratings agencies.

Israel still has $3.8 billion left to use by 2011 after already issuing $4.1 billion in bonds backed by the U.S. and a $1.1 billion deduction for Israeli settlement building and concerns over a security fence in the West Bank.
Israel would only be able to use up to $3.2 billion in 2009 but another $333.3 million will be released in 2010 and another $333.3 million in 2011 if Israel sticks to its fiscal targets.

Under the deal with the United States, Israel must meet a 2009 budget deficit target of 6 percent of gross domestic product and keep fiscal spending to 3.05 percent above 2008 spending.

In 2010, Israel's budget deficit cannot exceed 5.5 percent of GDP while state spending cannot be 1.7 percent above 2009 levels.

Those targets are the basis of Israel's 2009 and 2010 budgets, which lawmakers are expected to approve in the next few weeks.

Israel also has to present a roadmap for a new medium-term fiscal rule that would guide spending growth and deficits through 2015 while progress on privatisation of state-owned seaports and the electricity sector must continue.

The US and Israel agreed to expand a partnership in energy and technology research and development activities and in 2010, Israel will be required to improve intellectual property rights protection.

According to the deal, the guarantees amount may be reduced for activities the president of the United States determines are inconsistent with the objectives and understandings reached between the United States and State of Israel regarding implementation of the loan guarantee programme.