Prime Minister Binyamin Netanyahu pledged to advance peace efforts with the Palestinians after talks with Chancellor Angela Merkel of Germany, whose government says it will pay one-third of the cost of Israel's sixth German-built submarine.

The two leaders met during a two-day visit by Merkel and most of her Cabinet for a joint cabinet session that took place amid growing strains between the two countries, particularly over Netanyahu's refusal to end Jewish settlement of the occupied West Bank.

Another source of friction is Germany's participation with the United States and European allies in negotiating detente with Iran, which Netanyahu sees as Israel's mortal enemy because of its contentious nuclear program.

The Israelis are concerned too about Merkel's new policy of boosting German arms exports, and its efforts to sell Egypt two Type-209 submarines and hundreds of Leopard tanks to Saudi Arabia and other Arab states.

But Netanyahu cannot afford to alienate Berlin because the Germans are building three more advanced Dolphin-class submarines for the Israeli navy, which already has three of the boats that it has adapted to carry nuclear-tipped cruise missiles.

It remains to be seen whether the Israelis will make the concessions that will advance the flagging peace process that began in 1993 with the Oslo Accords, but the growing diplomatic strains between Israel and Germany could impact heavily on the Jewish state's military procurement program.

Merkel, who arrived in Israel Monday, told a news conference after the first round of talks that Germany has worked with Israel "shoulder to shoulder" for five decades "to secure the future of the State of Israel ... alongside a Palestinian state."

Netanyahu talked of "finding ways" to make peace with the Palestinians, but it was not clear whether he made any specific commitments in line with German perceptions.

The German news magazine Der Spiegel reported before Merkel's visit that she and Netanyahu often got into shouting matches in their telephone conversations, largely over the Palestinian issue, and that relations between Germany and Israel "have never been as difficult during Merkel's three terms in office as they are now."

But the U.S. publication Defense News reported Monday that Germany is doubling its security assistance to Israel by allocating $180 million to subsidize the cost of the sixth diesel-electric submarine, an estimated $824.2 million.

Like the other five Dolphins Israel has in service or under order, the sixth boat will be built at the Kiel shipyards of Howaldtswerke-Deutsche Werft, the shipbuilding division of the giant Thyssen-Krupp Marine Systems.

The rest of the cost of that boat will come from Israel, and out of the annual $3.1 billion in military aid the United States provides the Jewish state.

Defense News reports that the director-general of Israel's Defense Ministry, retired Maj. Gen. Udi Shani will fly to Berlin next week to sign a memorandum of understanding for the sixth sub.

The first three Dolphins built by HDW are all operational. Two were funded by Germany and the third jointly by the two states.

Dolphins 4 and 5, with Berlin paying about one-third of the cost, are still under construction, but are scheduled for delivery in 2013 and 2014. No. 6 is expected to be operational by 2021.

Israel's navy is already the most powerful in the Middle East. The submarines provide Israel with a strategic reach beyond all of its adversaries, particularly Iran, and a nuclear triad of ground-based, airborne and seaborne delivery systems.

In December, Israel said it would purchase two frigates from Germany, believed to be MEKO-class F221 frigates to be built by Blohm + Voss in Hamburg under a $1.37 contract.

Meantime, the Germans are providing Israel's air force with radar units for its Raytheon MIM-104 PAC-2 Patriot air-defense systems, cost-free, to maintain air defense coverage of the Jewish state while its PAC-2 radars are being upgraded by the U.S. Army.

That $15 million process will take about three years.

Shimon Stein, a former Israeli ambassador to Germany, told Defense News that despite the often public diplomatic spat between Israel and Germany, defense relations and strategic cooperation between them remain strong.

"There appears to be parallel tracks that allow Germany, and the United States for that matter, to augment security cooperation regardless of the frustration at the political and even personal level."