Israeli government ministers and labor leaders have recommended a merger between state-owned Israel Military Industries and Rafael Advanced Defense Systems in a major shake-up in Israel's high-tech defense industry.

The move, if approved by the government, could affect Israel's drive to build a protective shield of missile systems designed to counter a massive bombardment of missiles and rockets that the country's military planners anticipate in any major hostilities that erupt with Iran, Syria and their proxies Hezbollah in Lebanon and Hamas in the Palestinian-ruled Gaza Strip.

Israel Aerospace Industries, the flagship of Israel's defense industry, is worried that the move could jeopardize development of its Arrow-3 anti-ballistic missile system for which IMI provides the powerful motors.

IAI, the nation's leading missile manufacturer, is also concerned about greater competition from Rafael, a key rival if it does take over IMI.

This concern stems particularly from major advances by Rafael in missile development and manufacturing in recent years, such as the Iron Dome and David's Sling systems.

Iron Dome, which is yet to become operational, is designed to shoot down short-range missiles and rockets.

David's Sling, still under development and not expected to be operational until 2012 at the earliest, is intended to counter medium-range missiles and rockets.

Arrow-3 is the long-range, high-altitude component in a planned three-tier missile defense system to protect the Jewish state from unprecedented mass missile attacks.

The decision to green-light an IMI-Rafael merger was made last Thursday by Finance Minister Yuval Steinitz, Defense Minister Ehud Barak and Ofer Eini, chairman of the Histadrut, Israel's General Federation of Labor.

The proposal, which was also supported by IMI's union representatives, must be approved by the Cabinet headed by Prime Minister Binyamin Netanyahu.

Further meetings are scheduled with top executives of IAI, IMI and Rafael in the meantime.

IMI's future has hung in the balance for many months because of a financial crisis brought on by its poor performance compared to other state-owned defense enterprises.

The Finance Ministry initially proposed privatizing IMI. The company's executives, as well as its unions and the Defense Ministry, opposed that. The Finance Ministry retaliated by withholding financial guarantees for foreign contracts from the company.

The firm has also been incensed by the bleak forecasts about the company issued by the Government Companies Authority.

The privatization plan came to nothing and the government instead looked to possible mergers with IAI or Rafael.

IAI, currently ranked the 30th largest defense company in the world, has long envisioned a new state-owned defense conglomerate with itself as the leading component.

It claims that would be better able to compete in foreign markets than the defense industry is now.

Israel's leading privately owned defense contractor, Elbit Systems, has also shown strong interest in acquiring IMI.

The Globes business daily quoted Finance Ministry officials as saying that despite the despite the recommendation to merge IMI with Rafael, the government-labor team was "still open to listening to IAI and to reviewing its position on the merger plan."

IAI's concerns about an IMI-Rafael tie-up stem mainly from the impact it would have on IAI's missile development plans.

Apart from the Arrow program -- the latest variant is designed to shoot down Iranian ballistic missiles outside Earth's atmosphere -- IAI also manufactures various versions of the Barak surface-to-air missile designed to protect warships and strategic land installations.

IMI supplied the power plants for these missile systems from its Givon factory.

IAI's Missile and Space Division "is concerned that Rafael, as IMI's new owner, will raise the prices for the motors for a range of missiles, which could intensify the already tense relationship between the two government-owned defense companies," Globes reported.

"The long-standing, close IAI-IMI relationship over missile motor manufacturing was one of IAI's arguments in recent weeks about taking over IMI …

"If IMI is ultimately merged with Rafael, IAI will have to work out a reasonable arrangement to ensure continued manufacturing of motors for its missiles," Globes observed.