A dispute between two major defense companies has blocked the Israeli military's plans to install systems on new armored personnel carriers to knock out enemy missiles.

The Jerusalem Post reported Monday that Rafael Advanced Defense Systems and Israel Military Industries refuse to abide by an order from Udi Shani, director general of the Defense Ministry, to combine the two systems they have developed separately into a single system.

It isn't clear how the ministry will resolve the dispute. But it follows a decision by Defense Minister Ehud Barak and Finance Minister Yuval Steinitz to abandon a planned merger between Rafael, founded 50 years ago as part of the Defense Ministry, and state-owned IMI.

Instead, Prime Minister Binyamin Netanyahu's right-wing government will seek to promote plans to privatize problem-plagued IMI.

There are also plans to privatize Israel Aerospace Industries, the country's biggest and most successful defense company.

"Mutual suspicions and Rafael's deep worries about IMI's financial condition and liabilities and the lack of clarity about the government's willingness to provide the money needed to close IMI's hole, as well as the issues of privatization, have stymied the merger," the Globes business daily reported.

Defense industry insiders say that the planned merger was flawed from the start and that merging IMI with IAI would have made more sense.

"If IAI had been allowed to lead the merger, it would dismantle IMI and scatter its units among IAI's divisions with synergetic operations," observed David Arzi, chairman of ImageSat, jointly owned by IAI and Elbit Systems, the dominant private company in the high-tech defense sector.

"Some parts of IMI could have gone to IAI subsidiary Elta Systems."

Regarding the rivalry over the missile systems, the Defense Ministry, beset by budgetary problems, decided it was too expensive to go on investing in two systems by two government-owned companies and ordered the firms to combine the systems into one.

"We know what we want and that's a single system with all the capabilities combined," the Post quoted a senior military officer as saying.

Rafael's system is called Trophy and installation on the army's Merkava 4 main battle tanks has already begun. The military wants to extend that program to the older Merkava 3s as well.

Trophy provides all-round protection against anti-tank missiles and successfully intercepted a rocket propelled grenade fired by Palestinian militants on the border with the Gaza Strip earlier this year.

Its radar, manufactured by Elta Systems, the IAI subsidiary, can detect and intercept incoming hostile threats.

IMI's system is known as Iron Fist and is reportedly capable of intercepting tank shells.

The military has planned to install it on the new Namer APCs in 2009 but canceled that after defects were found. Those have been rectified, IMI says. Iron Fist has reputedly undergone hundreds of successful test interceptions.

IMI builds the Namer, which went into Israeli service in 2008.

Both companies claim their systems are in compatible. The Post's military correspondent, Yaakov Katz, reported that both outfits said "they are willing to continue developing their systems independently and without funding from the ministry."

The question of reinforcing the defenses of the Merkavas and the Namers, considered to be the ultimate in APC technology, comes amid intelligence reports that Hezbollah in Lebanon and Hamas in the Gaza Strip are being armed with advanced Russian-designed anti-armor missiles by Iran and Syria.

The need for such upgraded defenses became apparent during the 34-day war between Israel and Hezbollah in July and August of 2006, when Israel's armored forces suffered heavy losses because the Iranian-backed group had advanced anti-tank weapons.

The Namer, based on the Merkava 4, is being deployed with the crack Golani Brigade. One battalion has been equipped with the new APC, and the brigade's three other battalions are scheduled to follow over the next three years.

Production of the Namer has begun in the United States by General Dynamics, which will build 600 over the next eight years.

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