Israel's right-wing Prime Minister Ariel Sharon said Monday he was willing to call a snap election if his main coalition partner, the centre-left Labour Party, pressed on with a threatened rebellion over funding to Jewish settlements in the Palestinian territories.

As Sharon and Labour's leader, Defence Minister Binyamin Ben-Eliezer, faced a test of nerves ahead of Wednesday's budget vote in parliament, Palestinian leader Yasser Arafat appeared to have warded off a similar showdown with his own legislature, as Israel hindered deputies from assembling in Ramallah. 

Against the backdrop of political tremors on both sides, the two-year conflict claimed yet another victim, as Israeli troops gunned down a Palestinian teenager in the reoccupied West Bank, whom the army accused of trying to plant of a bomb. 

“If we are forced into elections by irresponsible behaviour or for internal political reasons, we are ready, we will win and Likud will continue to lead the country,” Sharon told deputies from his Likud Party. 

The crisis has been brought on by the worst economic slump in Israel's history, provoked by a global downturn in hi-tech industries and the cost of fighting the Intifada. 

Labour has bridled at the fact that Jewish settlements — considered illegal by the international community and the main cause of friction in the Intifada — are not facing the same cuts as other sectors in Sharon's 2003 austerity budget. 

Labour's central committee on Sunday gave deputies a mandate to vote against the budget at its first reading in parliament on Wednesday, after Sharon said he would sack any minister who refused to back the belt-tightening measures. 

The collapse of the 18-month-old coalition would precipitate elections within 90 days, some nine months before they are due, and throw both Sharon and Ben-Eliezer into battles to retain their parties' leadership. 

Sharon could however opt to form a far narrower coalition in which the far-right would hold much greater sway. 

Sharon, a long-time backer of the settlement movement, also said that a call to freeze settlement activity was a sticking point in a US-backed road map for peace designed to find a way out of the bloody conflict that has cost more than 2,600 lives. 

The former general had given the plan a cool reception when it was presented last week by US special envoy William Burns. 

But he told the parliamentary foreign affairs and defence committee he accepted the plan in principle, although he balked at a total freeze which would not allow for the settlements' “natural demographic growth”. 

Some of the settlements are small towns with up to 20,000 inhabitants, used as dormitory suburbs for occupied Jerusalem by workers enjoying tax-breaks. 

Others are unauthorised primitive camps consisting of a few caravans built on hilltops by armed hardliners who use force to resist attempts by the security forces to dismantle them. 

Burns brought the plan here for Israeli and Palestinian reactions last week, receiving a cool response from both sides, especially from the Palestinians who resented his refusal to meet their leader Yasser Arafat. 

Washington backs Israeli demands for Arafat to be dropped for failing to curb attacks by resistance groups seeking to end Israeli occupation of Palestinian lands. 

The “roadmap” demands the dismantling of illegal outposts, a settlement freeze and an end to military operations in Palestinian autonomous areas, which in the West Bank have been almost entirely reoccupied by Israeli forces since June. 

On the other hand, the Palestinians are meant to name a prime minister, streamline their security forces into a single manageable body, and resume security cooperation with the Jewish state, Israeli media say. 

Complying with all the measures would lead to the creation of a de facto Palestinian state — but without final borders — by next year, with the shape of the state to be finally thrashed out by 2005. 

Israeli officials close to Sharon have expressed concern at the speed of the timetable and claim Israel would be forced into what they described as tough “concessions” while the Palestinians could try to renege on their side of the bargain. 

Meanwhile in Ramallah, Arafat appeared to have headed off a revolt by the Palestinian parliament, dominated by his own Fatah party. 

In last-minute talks with Fateh, Arafat managed to secure the faction's backing for his new cabinet, after its MPs forced the abandonment of a previous line-up last month. 

But the actual vote in parliament was delayed until Tuesday morning after Israel denied 13 MPs permission to travel to Ramallah because of alleged involvement in anti-occupation activities.