Officials said Olmert and Defense Minister Amir Peretz have been arguing over authority to decide the winner of an estimated $500 million contract to develop a system to protect Israel from short- and medium-range rockets and missiles.

On Thursday, Peretz announced that the state-owned Rafael, Israel Armament Development Authority won the project, but hours later Olmert dismissed the decision, Middle East Newsline reported.

"This doesn't mean that the government will accept the selection of the defense establishment," Pensioner Affair Minister Rafi Eitan, an ally of Olmert, said on Friday. "The government has other considerations."

Officials said the dispute between Olmert and Peretz reflected the lack of cooperation between the two senior ministers. The political careers of both men have been jeopardized amid an investigation by a commission into the war in Lebanon in mid-2006. Over the last few months, Olmert has been pressing Peretz to resign his post.

Defense Ministry officials said Rafael presented the most comprehensive solution to defend a range of threats. They said a panel of experts recommended Rafael's "Iron Dome" system, meant to intercept everything from Kassam short-range missiles and Katyusha rockets to the Zelzal medium-range rocket.

Officials said a panel established by Peretz examined missile defense systems designed by Israel Aerospace Industries, Israel Military Industries, Lockheed Martin and Northrop Grumman. They said the systems were rated by development and cost.

"You can't convert every national security issue into a political feud," Deputy Defense Minister Ephraim Sneh said. "This is irresponsible."

But Olmert dismissed the decision, saying one system would not resolve the missile threat against Israel. Aides said several development options should be explored, particularly one by the state-owned IAI.

Officials said Israeli law requires that every defense project of at least 500 million shekels undergo approval by a Cabinet panel. But they said the Cabinet has never sought to replace contractors selected by the Defense Ministry.

"Everybody pressured [for contractors], including Knesset members and government ministers," Sneh said. "The decision to select Iron Dome was a professional decision that can't be taken by the Health Ministry or the Religious Affairs Ministry."

IAI has offered to fund its own rocket and missile defense system on condition that Israel enables exports after deployment by the Israel Defense Forces. Aides to Olmert said the IAI offer would be reviewed by the Cabinet as well as the ministerial committee on security.

"The defense minister's decision carries no weight," an Olmert aide said. "The Finance Ministry has not allocated funding for such a system."

Rafael's solution was based on a kinetic interceptor with technology from its Python-5 air-to-air missile for the destruction of medium-range rockets. Rafael has been teamed with the U.S. company Raytheon, which has developed and tested a solid-state laser for the destruction of short-range rockets and mortars.

In May 2006, Rafael and Raytheon were awarded a Defense Ministry contract to design the Short-Range Ballistic Missile Defense. The two companies submitted a proposal, dubbed "Magic Wand," for a kinetic interceptor that could destroy incoming rockets fired from up to a range of 280 kilometers.

Rafael executives said Magic Wand and Iron Dome would have a common radar and command and control system. They said IAI subsidiary Elta Electronics Industries would develop the radar.

"From my experience, it would take four to five years [to develop]," [Res.] Maj. Gen. Yitzhak Ben-Yisrael, former chief of research and development at the Defense Ministry, said.

On Thursday, Syria was said to have completed a successful flight test of the Scud D medium range missile. Israel's media reports did not provide details of the test, the first since the awry flight of the Scud D in 2005.

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