A Russian shipment of Yakhont anti-ship missiles to Syria was condemned by the United States on Friday and Israel is also alarmed by the prospect of Russia supplying S-300 advanced air defense missile systems to Damascus.

While Israel has declined to take sides in the civil war between Syrian President Bashar al-Assad and rebels trying to topple him, Western and Israeli sources say it has launched air strikes inside Syria in a bid to destroy weapons it believes are destined for the Lebanese group Hezbollah.

Justice Minister Tzipi Livni told Army Radio: “(Weapons) could reach others in Syria or Lebanon and be used against Israel.”

“These are not just any weapons, they are tie-breakers, and that’s why there is a responsibility with all world powers, certainly Russia, not to supply such arms,” Livni said, adding that Israel had the right to defend itself.

Israel has neither denied nor confirmed reports that it attacked Iranian-supplied missiles stored near Damascus this month that it believed were awaiting delivery to Hezbollah, an Assad ally which fought a war with Israel in 2006.

Senior Israeli defense official Amos Gilad said the S-300 and the Yakhont would likely end up with Hezbollah and threaten both Israel and U.S. forces in the Gulf.

“If Hezbollah and Iran are supporting Syria and propping the (Assad) regime up, then why shouldn’t it transfer those weapons to Hezbollah? You don’t even have to be an intelligence expert, it makes sense that they will,” Gilad told Channel Two television’s Meet the Press.

In comments to Israel Radio on Friday, Gilad said: “If you ask the Russians if these weapons will be passed on to Hezbollah, they will say: ‘No, that is against Russian law.’ But it’s not certain that Russian law is something they will respect. So if Hezbollah can put its hands on them, it will.”

The two-year-old civil war in Syria between Assad’s forces and rebel fighters has killed at least 80,000 people and driven 1.5 million abroad.

(Writing by Maayan Lubell; Editing by Robin Pomeroy)

Israel has been sending mixed signals on its internationally condemned settlement policy as Kerry pursues efforts to revive negotiations Palestinians quit in 2010 in anger over Israeli settlement building on occupied land they seek for a state.

In a reply to a Supreme Court petition by the Israeli anti-settlement group Peace Now, the government said it had taken steps in recent weeks to authorize retroactively four West Bank outposts built without official permission.

“The intention to legalize outposts as new settlements is no less than a slap in the face of Secretary Kerry’s new process and is blatant reassurance to settler interests,” Peace Now said in a statement.

A spokesman for Prime Minister Benjamin Netanyahu declined to comment on the government’s response to the court.

Most the world deems all Israeli settlements in the West Bank, which Israel captured in the 1967 Middle East war, as illegal. Israel disputes this and distinguishes between about 120 government-authorized settlements and dozens of outposts built by settlers without permission.

Last week, Peace Now and Israeli media reports said Netanyahu has been quietly curbing some settlement activity by freezing tenders for new housing projects, in an apparent effort to help the U.S. drive to renew peace talks.

But Peace Now said at the time construction already under way was continuing, and Israel announced last week that it had given preliminary approval for 300 new homes in Beit El settlement as part of a plan Netanyahu announced a year ago.

Kerry, due to meet Netanyahu and Palestinian President Mahmoud Abbas separately next week, has said he believes “the parties are serious” about finding a way back into talks.

The main issues that would have to be resolved in a peace agreement include the borders between Israel and a Palestinian state, the future of Jewish settlements, the fate of Palestinian refugees and the status of Jerusalem.

Some 500,000 Israelis have settled in the West Bank and East Jerusalem, which was also captured from Jordan in 1967. About 2.7 million Palestinians live in those areas.

(Editing by Jeffrey Heller and Alistair Lyon)

Under a cascade of negative media attention, Bank Leumi
, Israel’s second largest bank, abruptly cancelled its
plans to forego 150 million shekels ($42 million) – a third of
the debt owed by Dankner’s Ganden Investments.

After first defending the deal as the best it was likely to
get from Dankner, Leumi suddenly announced it had revoked the
offer because it concluded that another businessman was going to
call off an investment in Dankner’s company.

Leumi’s announcement included a nod to public opinion: CEO
Rakefet Russak-Aminoach “stressed that the bank is responsive to
the hearts of the public and respects them,” it said.

The reversal was widely perceived as a sign of change in
Israel, where heat is still on from a summer of mass street
protests two years ago against the high cost of living.

In an election last January, middle-class dissatisfaction
helped to propel political newcomers promoting economic and
social reform to key positions in Prime Minister Benjamin
Netanyahu’s new coalition government.

The shift in tone and voter sentiment is dramatic in a
country with one of the highest concentrations of corporate
power in the developed world and a skyline of towers in business
capital Tel Aviv housing the ultra-rich.

Stung by an unexpectedly weak showing for his party in the
ballot, Netanyahu is now vowing to crack down on “monopolies and
cartels that prevent competition and thwart price-lowering”.

“It seems things are going to change,” said Daniel Doron
head of the Israel Center for Social and Economic Progress. “For
the first time in years, Israelis voted on economic issues, not
security and there are now people who want to make changes.”

FACEBOOK RAGE

Like the protests that drew crowds of hundreds of thousands
two years ago, the campaign against Dankner’s debt write-off by
Bank Leumi gathered pace on the Internet after the Israeli media
caught wind of the deal. Thousands joined a “Boycott Bank Leumi”
Facebook page.

The Bank of Israel, the central bank, now says it plans to
investigate the cancelled deal.

A spokeswoman for Leumi said that, since cancelling
Dankner’s debt break last month, the bank had not entered into
new negotiations with him and was “continuing all options to
collect the debt”.

Dankner’s firm Ganden said debt restructuring deals like the
one it was planning with Leumi have always been a normal part of
business in Israel and other Western countries. The companies
that are part of Dankner’s IDB group have historically paid all
their debts on time and are still working on a bank deal, said a
spokeswoman.

“We are convinced we can also reach a fair and agreed
arrangement with the banks,” she said.

Dankner’s IDB conglomerate is one of 10 large business
groups that control about 30 percent of the market value of
public companies in Israel.

Such conglomerates make use of a “pyramid” corporate
structure, using tiers of holding companies to allow a powerful
shareholder to hold sway over a business empire while actually
owning only a fraction of equity in the companies it controls.

In Dankner’s case, Ganden is a private company through which
he controls IDB Holding Corp, which in turn controls
Israel’s largest supermarket chain Super-Sol, Clal
Insurance and leading mobile phone operator Cellcom
.

IDB declined to comment on its corporate structure.

A businessman at the top of a pyramid can control a company
at the bottom with less than 10 percent of the capital.

Critics say such business structures impede competition,
keep prices high and stunt economic growth. By controlling
financial assets, pyramids can give their businesses access to
easy credit, creating risk across the financial system.

Israel is expected to pass a law this year constricting the
power of pyramids. Holding companies will have to limit how many
tiers of subsidiaries they have. Conglomerates will have to
choose between owning major financial or non-financial concerns.

The law could hurt tycoons, said Richard Gussow, senior
analyst at DS Securities: “They will have to restructure, sell
companies, and since everyone knows they are going to sell, they
might not get the full value for them,” Gussow said.

DEBT

Big debtors account for an increasing portion of the
corporate bond market. At the end of 2012, 91 percent of
outstanding debt in Israel’s corporate bond market was issued by
companies with more than 500 million shekels of debt, up from
75.5 percent in 2004, according to the central bank.

Israel’s Security Authority said that in 2012 about 28
corporations opened negotiations for debt rescheduling with
bondholders and that this was “worrying”.

Israeli media say the total owed by Danker’s firms is 9
billion shekels ($2.5 billion).

IDB Development, one unit of IDB Holding, owes nearly 6
billion shekels. Earlier this month, an Israeli court rejected
bondholders’ demands to hand them control of IDB Development as
part of a debt settlement plan. The court appointed outside
observers to monitor IDB’s conduct.

“This court has never seen such an extreme case in which
financial institutions gave credit at such sums, with no
collateral and without providing any explanation,” Judge Eitan
Orenstein said.

Outside the courtroom Dankner told reporters that IDB
Development had enough assets to pay its creditors.

“The company has wonderful assets, some of the best in
Israel’s market, worth a lot of money, worth billions, and if
the company wants to it can realize those assets,” he said.

Many of the IDB companies have already been hit by slowing
economic growth and accelerated competition. Shares in IDB
Holding have fallen more than 16 percent so far in 2013 after
plunging 74 percent in 2012.

A subsidiary of IDB partnered with Israeli tycoon Yitzhak
Tshuva’s Elad Group to invest $1.2 billion in land in Las Vegas.
Their plans to build a casino, just before the U.S. real estate
market crashed, created heavy losses for the company.

SHIFT

Netanyahu has long been a champion of free enterprise in a
Jewish state founded on socialist roots. He promised to revamp
the economy in his previous term in office, but little changed.

Morris Dorfman, head of the National Economics Council which
advises the prime minister on economic matters, said the shift
in public mood now made more aggressive change possible:
“Reforms are easier (now) because of public opinion.”

A draft budget law, set to be approved by the cabinet on
Monday, includes measures that would cut red tape to increase
food imports and limit dominant food retailers opening new shops
– moves aimed at boosting competition and lowering prices.

“These reforms will be on land, sea and air, in every
field,” Netanyahu said on April 28.

Protests over the economy helped make neophyte politicians
Yair Lapid and Naftali Bennett the stars of the last election.
Lapid is now finance minister and Bennett is economy minister,
the most important allies in Netanyahu’s coalition. Bennett
heads a newly-announced ministerial committee tasked with
breaking down monopolies.

Other politicians have been drawn into the public chorus of
anger over Dankner’s proposed Bank Leumi deal.

“Regular people face monstrous interest rates and aren’t
eligible for the same convenient terms of the tycoons, who have
set up pyramids. They end up asking for debt arrangements,
despite their serial failures, and keep getting credit,” said
Zehava Galon, head of Israel’s leftist Meretz party.

Matan Hodorov, senior economic correspondent for Israel’s
Channel 10 television, said the attention being given to
economic affairs was transforming public discourse.

“It’s an astounding change. Economic matters that were once
deemed too complicated for the public are now, following the
(2011) social protest, headline news. People now want to know
what powers are at play, who makes the moves,” Hodorov said.

Ben Zygier, 34, received “distressing news” from his wife just hours before hanging himself, but the jailer responsible for watching surveillance video from the isolation cell was away from the screen and missed the moments leading up to his death.

The case was kept secret until February, when an Australian television expose uncovered it, sparking frenzied media debate about Zygier’s intelligence role and the nature of his alleged crime.

A report into his death published on Thursday suggested that the prison service had not complied with special instructions on supervising Zygier, who was not considered a top suicide risk despite admitting previous urges to kill himself.

However, the Attorney General said “the evidence is not sufficient in proving … that the Prison Authority, or anyone else, negligently caused the deceased’s death”.

Without explicitly naming Zygier, Israel confirmed in 2010 that it had a dual nationality citizen in custody to prevent serious harm to national interests. The charges against him still remain top secret and under a gag order.

Australia’s Fairfax newspapers and German Der Spiegel said last month that Zygier was a spy for the Mossad intelligence agency and had unwittingly given away secret information about Lebanese informants, who were later arrested and jailed in Lebanon.

“AGITATED AND UPSET”

According to Thursday’s report, Zygier was held in isolation in a cell that was under 24-hour video surveillance. He had regular sessions with social workers and psychiatrists, and was allowed family visits at the jail in Ayalon, central Israel.

On the day of his death, the report said Zygier had seen his pregnant wife and daughter, and received undisclosed news that left him “crying, agitated and upset”.

The prison social worker testified that Zygier often displayed such emotions after family visits. When she asked after Zygier’s mood later on the same day, she was told that he was relaxed and watching television.

About two hours later, Zygier went into his bathroom, looped a wet sheet around his neck, tied it to the bars of a window and hanged himself. The guard monitoring the video had been asked to help out the understaffed team in the prison’s central command center, which was not hooked up to the camera in question.

Lior Brand, a friend of Zygier’s, told Reuters in March that he cared deeply about Israel and wanted to do his bit for its security, but lacked the required emotional resilience.

“There was a background security check, his friends told them that he was unfit … they should not have recruited him,” Brand said, without naming the agency that took Zygier in. “What hurts is that the whole thing could have been avoided.”

(Editing by Crispian Balmer and Mark Trevelyan)

The assessment met with scepticism from the United States, which has declared any use of chemical weapons in Syria’s two-year-old civil war a “red line” that could trigger intervention.

U.S. Secretary of State John Kerry said he spoke to Israeli Prime Minister Benjamin Netanyahu and the latter “was not in a position to confirm” the briefing given by Itai Brun, a military intelligence brigadier-general, at a Tel Aviv conference.

“I don’t know what the facts are,” Kerry told reporters in Brussels.

Netanyahu’s office declined comment on Kerry and Brun’s remarks, made a day after U.S. Defence Secretary Chuck Hagel said while visiting Israel that Washington’s spy agencies were still assessing whether such weapons had been employed.

“To the best of our understanding, there was use of lethal chemical weapons. Which chemical weapons? Probably sarin,” Brun told Tel Aviv University’s Institute for National Security Studies in the most definitive Israeli statement on the issue to date.

Forces loyal to Assad were behind the attacks on “armed (rebels) on a number of occasions in the past few months, including the most reported incident on March 19″, Brun said.

The Syrian government and rebels last month accused each other of launching a chemical attack near the northern city of Aleppo.

Brun’s comments seemed likely to deepen international concern over events in Syria. Kerry said separately on Tuesday that NATO needed to consider how practically prepared it was to “respond to protect its members from a Syrian threat, including any potential chemical weapons threat”.

FOAMING AT MOUTH

Speaking with a Powerpoint presentation showing what appeared to be a wounded or dead child, Brun said that foam coming out of victims’ mouths and contracted pupils and “other signs” indicated deadly gas had been used.

He gave no other details about how Israel, which has been closely monitoring events in Syria, a northern neighbour, formed its assessment.

Another Israeli military officer with knowledge of Brun’s briefing said it drew on secret intelligence other than material available in the public domain.

“When an authority as senior as Brun makes such a statement in public, you can be sure it is based on solid evidence,” the officer told Reuters on condition of anonymity.

Ralf Trapp, an independent consultant on chemical and biological weapons arms control based in Geneva, said the symptoms described by Israeli intelligence were “consistent with sarin gas,” but photographic evidence alone was not conclusive.

“There is a limit to what you can extract from photograph evidence alone. What you really need is to get information from on the ground, to gather physical evidence and to talk to witnesses as well as medical staff who treated victims.”

Asked about Brun’s remarks, Pentagon spokesman George Little signalled no change in the official U.S. line: “The United States continues to assess reports of chemical weapons use in Syria. The use of such weapons would be entirely unacceptable.”

On Monday, Hagel said the use of chemical weapons by Assad’s forces would be a “game changer” and the United States and Israel “have options for all contingencies”.

Hagel met Netanyahu on Tuesday, a day after flying in an Israeli military helicopter over the occupied Golan Heights on the edge of the fighting in Syria.

“This is a difficult and dangerous time, this is a time when friends and allies must remain close, closer than ever,” Hagel, in remarks to reporters before his talks with Netanyahu, said of the United States and Israel.

Discussions between Syria and the United Nations on a U.N. investigation of possible use of chemical weapons have been at an impasse due to the Syrian government’s refusal to let the inspectors visit anywhere but Aleppo, diplomats and U.N. officials said last week.

U.N. diplomats said Britain and France had provided U.N. Secretary-General Ban Ki-moon’s office with what they believed to be strong evidence that chemical weapons also had been used in the city of Homs.

Israel, which has advanced intelligence capabilities that it shares with its Western allies, has voiced concern that parts of Syria’s chemical arsenal would end up in the hands of jihadi fighters or the Lebanese guerrilla group Hezbollah, with which it waged a war in 2006.

Israeli leaders have cautioned they will not allow that to happen. In an attack it has not formally confirmed, Israeli planes bombed an arms convoy in Syria in February, destroying anti-aircraft weapons destined for Hezbollah.

(Additional reporting by Jeffrey Heller and David Alexander in Jerusalem, David Brunnstrom in Brussels and Anthony Deutsch in Amsterdam; Editing by Jeffrey Heller, Alison Williams and Mike Collett-White)

Brigadier-General Itai Brun made the comments at a Tel Aviv security conference a day after U.S. Defense Secretary Chuck Hagel said on a visit to Israel that U.S. intelligence agencies were still assessing whether such weapons had been employed.

U.S. President Barack Obama has called the use of chemical weapons a “red line” for the United States that would trigger unspecified U.S. action.

“To the best of our understanding, there was use of lethal chemical weapons. Which chemical weapons? Probably sarin,” Brun said in the most definitive Israeli statement on the issue to date.

Photos of victims showing foam coming out of their mouths and contracted pupils were signs deadly gas had been used, he said.

Forces loyal to Assad were behind the attacks on “armed (rebels) on a number of occasions in the past few months, including the most reported incident on March 19″, Brun said.

The Syrian government and rebels last month accused each other of launching a chemical attack near the northern city of Aleppo.

On Monday, Hagel said the use of chemical weapons by Assad’s forces would be a “game changer” and the United States and Israel “have options for all contingencies”.

Hagel met Prime Minister Benjamin Netanyahu in Jerusalem on Tuesday, a day after flying in an Israeli military helicopter over the occupied Golan Heights on the edge of the fighting in Syria that has entered its third year.

“This is a difficult and dangerous time, this is a time when friends and allies must remain close, closer than ever,” Hagel, in remarks to reporters before his talks with Netanyahu, said about the United States and Israel.

IMPASSE

Discussions between Syria and the United Nations on a U.N. investigation of possible use of chemical weapons have been at an impasse due to the Syrian government’s refusal to let the inspectors visit anywhere but Aleppo, diplomats and U.N. officials said last week.

U.N. diplomats said Britain and France had provided Ban’s office with what they believed to be strong evidence that chemical weapons also had been used in the city of Homs.

Israel, which has advanced intelligence capabilities that it shares with its Western allies, has voiced concerned that parts of Syria’s chemical arsenal would end up in the hands of jihadi fighters or the Lebanese guerrilla group Hezbollah, with which it waged a 2006 war.

Israel leaders have cautioned they will not allow that to happen. In an attack it has not formally confirmed, Israeli planes bombed an arms convoy in Syria in February, destroying anti-aircraft weapons destined for Hezbollah.

Brun, who was speaking at the annual security conference of The Institute for National Security Studies at Tel Aviv University, said Israel’s military was studying a number of future scenarios facing Syria.

“More likely, as time goes by, are the scenarios of chaos and anarchy, or that of (Syria) breaking up into cantons. These pose major challenges for Israel. The chance of a different central government still exists, but it is growing less likely with time,” Brun said.

(Additional reporting by Jeffrey Heller and David Alexander; Editing by Jeffrey Heller and Alison Williams)

Small Israeli military lookout posts abandoned for years have been put into action and regular military and special forces have replaced reservists at many points.

Israel is worried that the Golan, which it captured from Syria in 1967, will become a springboard for attacks on Israelis by jihadi fighters, who are taking part in the armed struggle against Syrian President Bashar al-Assad.

In recent months, battles between Assad loyalists and rebels have raged in some villages on the Syrian foothills of the Golan, with mortar shells and machinegun fire spilling across into Israeli-occupied territory.

Israel, which returned fire in some of those incidents, believes that around one in 10 of the rebels are Sunni Muslim radicals.

“Tension in the Golan Heights is the highest it has been since 1974,” a senior Israeli military officer in the area told Reuters this week. “We simply do not know who will control the territory next to the border.”

While the fall of Assad, an ally of Israel’s enemy Iran, could be in the Jewish state’s interest, a descent into chaos on the Golan Heights would pose a new security challenge.

Some 20,000 Israeli settlers live on the Golan and the strategic plateau overlooks Israeli towns and villages along the Sea of Galilee.

On its southern borders, Israel has long faced rocket attacks from armed Palestinian groups in the Gaza Strip and has watched with concern the rise of Islamist militancy in Egypt’s Sinai desert.

One Israeli general, the commander of forces in the north, raised the possibility in an Israeli newspaper interview last month of creating a buffer zone in Syria, in cooperation with local forces wary of jihadist fighters, should Assad be toppled.

“Some very key decision-makers are opposed,” an Israeli official said. “(Army chief) Benny Gantz, for example, was the Israeli commander who literally closed the door on south Lebanon when we withdrew from the security zone there in 2000, and he has shown little interest in seeing a repeat on the Golan.”

Alon Liel, a former diplomat who led secret peace talks with Damascus, said Israel had limited room for maneuver over Syria. “Israel is paralyzed from a diplomatic perspective,” he said. “We may be strong militarily but any intervention in a neighboring country would draw deep objection from both sides in Syria because Israel is so weak in the region diplomatically.”

SYRIA STRATEGY

World powers trying to craft a Syria strategy, and weighing whether to arm the rebels, have been struggling to distinguish between mainstream fighters who might stabilize the country should Assad fall, and jihadi insurgents.

“There’s no unified position on that yet,” a senior Israeli official said. “No one really knows what post-Assad Syria would look like. No one really knows who the rebels are as a collective.”

Israel has been wary of being seen to take sides in the Syrian conflict and Israeli Prime Minister Netanyahu has avoided echoing calls from Israel’s main ally, the United States, for Assad to step down.

One senior Western diplomat in Israel told Reuters Syria has been moving up a list of Israeli security concerns topped by Iran’s nuclear program.

“Syria is starting to edge ahead of Iran as far as the (Israeli) military is concerned, but also among politicians, partly because of U.S. reassurances over Iran but also because the situation in Syria is getting so alarming,” he said.

One Israeli official said the fluid situation in Syria meant that Israel had to assess events there almost daily.

“That makes for a far more intensive examination (by Israeli decision-makers),” the official said. “Add to that the fact there is a new (Israeli) government, with new ministers who have little time to get up to speed on these things.”

One of Israel’s main worries is the possibility of Syria’s chemical weapons falling into the hands of Lebanese guerrilla group Hezbollah, with which it fought a 2006 war, or ending up in the hands of jihadis.

Israel has cautioned it will not allow that to happen. In an attack it has not formally confirmed, Israeli planes bombed an arms convoy in Syria in February, according to Western sources, destroying anti-aircraft weapons destined for Hezbollah.

END OF UNDOF?

The green expanses and snow-capped mountains of the Golan are a major attraction for Israeli tourists who flock to the plateau. On a sunny spring day, a group of hikers admired the view as an elderly farmer slowly drove through his apple orchard.

A few miles away, Israeli troops on patrol stopped their armored vehicles near an old abandoned tank for a break. Asked if it was quiet that day, one soldier made a “so-so” hand gesture. “When it’s quiet, that’s when it’s scariest,” he said.

In another sign Israel was keeping a close eye on the area, two drones, visible from the road, were parked in a fenced-in facility.

Among those battling against Assad’s forces are fighters from the Nusra Front, an Islamist militant group linked to al Qaeda and blacklisted by the United States as a “terrorist group”.

Nusra Front forces, which include foreign fighters, have come to prominence in the revolt and last month fought in battles near the Israel-Syria ceasefire line

Last month, Assad’s forces appeared to push back the rebels in the area. “There is a still a visible (Syrian army) troop presence there, though it is unclear whether they have significant control or even a unified central command,” an Israeli official said.

Brigadier-General Yoav Mordechai, Israel’s chief military spokesman, told Army Radio last week that global jihad groups were fighting under the rebels, and “exploiting the anarchy”, some of them have moved into the Golan Heights.

“In the future we will have to deal with terrorism from the Golan Heights, after 40 years of impressive and exemplary quiet,” Mordechai said.

An Israeli military officer said new Defense Minister Moshe Yaalon had ordered “that no fire from Syria into Israel, be it deliberate or stray, is left without response.”

Israel is building a new, 5-metre tall fence on the Golan beside the older, partly rundown barrier that runs along the 70 km (45 mile) front.

The ceasefire line has been monitored since 1974 by a 1,000-strong U.N. Disengagement Observer Force (UNDOF). Arming the Syrian rebels could have implications for the peacekeepers, posing another potential headache for Israel.

Austria has cautioned that lifting the embargo to arm rebels would make the European Union a party to the conflict and make it difficult to keep the 375 Austrian peacekeepers on site.

UNDOF has faced increasing difficulties in the Golan and U.N. diplomats have expressed concern over its future. Last month, rebels held 21 Filipino UNDOF observers for three days, prompting the force to scale back on patrols.

Israeli military sources said they fear the peacekeeping force will not hold up under the insurgency in the Golan.

In the past three months, Japan and Croatia said they were withdrawing their troops. Should the Austrians leave, it could spell the end for the UNDOF mission because they are the biggest contingent and it is unclear who would want to replace them.

Austrian Foreign Minister Michael Spindelegger met Netanyahu on Thursday and is due to visit U.N. peacekeepers on the Golan Heights Friday.

“We have some of the world’s most dangerous weapons and we cannot allow them to fall into the world’s most dangerous hands: Hezbollah, al Qaeda and other terrorist groups,” Netanyahu told reporters as he and Spindelegger met.

“That is one of the great concerns for us and a great concern for you as well and I want to discuss with you how to prevent that from happening,” the Israeli leader said.

Spindelegger said Austria would try to stay as long as it could but that would not be possible without security guarantees from both rebel and government forces in Syria.

(Additional reporting by Crispian Balmer and Dan Williams in Jerusalem and Michael Shields in Vienna; Editing by Jeffrey Heller and Giles Elgood)

“Shots were fired at an IDF (Israel Defence Forces) patrol on the border. No injuries or damage was caused. In response, IDF forces returned precise fire at the source and reported a direct hit,” the spokeswoman said.

The U.N. Security Council voiced concern last week about the increasing spillover into the Golan Heights of the civil war being fought between forces loyal to Syrian President Bashar al-Assad and rebels trying to topple him.

Earlier on Tuesday a mortar shell fired during fighting between Syrian forces and rebels landed in the Israeli-controlled territory of the Golan Heights, military sources said.

It was unclear whether the gunfire or the shell were deliberately aimed at Israeli forces and the spokeswoman said it was not known whether they were fired by Assad’s forces or the rebels.

The shell landed in an open area near an Israeli settlement and caused no injuries, a military source said.

Shells have fallen several times inside Israeli-controlled territory and some incidents have drawn Israeli return fire.

Israel captured the Golan Heights from Syria in a 1967 war and annexed the strategic plateau in 1981 in a move that has not won international recognition. U.N. peacekeepers monitor the ceasefire line.

The Israeli military said it had conveyed an official protest over the incidents with the U.N. Disengagement Observer Force (UNDOF), which monitors a 45-mile (70-km) “area of separation” between Syrian and Israeli forces.

Defence Minister Moshe Yaalon, touring the Golan Heights earlier on Tuesday, said Israel would not intervene in Syria unless Israeli security was compromised.

Israel is concerned Lebanon’s Hezbollah guerrillas and al Qaeda could gain possession of Syria’s presumed arsenal of chemical weapons.

“We have acted against this and we will act in the future in order to prevent such weapons falling into the hands of irresponsible elements,” Yaalon said.

(Reporting by Maayan Lubell; Editing by Jason Webb and Robin Pomeroy)

Urging the younger generation to push politicians for change, Obama said a concerted effort must be made to secure an independent Palestinian state alongside a secure Israel.

The youthful audience repeatedly interrupted Obama with loud applause, holding up their cell phones to film his performance and giving him a standing ovation after a lone heckler was whisked away by security staff.

“He is a president who is also a rockstar. It’s amazing. He knows how to touch the hearts of the people,” said Gur Wallner, 25, a media student from the southern Israeli town of Sapir.

Israeli and Palestinian political leaders, however, were significantly less enthusiastic about his speech, which was billed as the highlight of Obama’s three-day visit.

“A Palestinian state is not the right way forward,” said Naftali Bennett, head of the pro-settler Jewish Home party, who was recently appointed industry and trade minister in Prime Minister Benjamin Netanyahu’s new center-right coalition.

Bennett dismissed Obama’s call for an end to the occupation of territory seized in the 1967 Middle East war, suggesting the land belonged to Israel.

“There is no such thing as a nation being an occupier in its own land,” Bennett said in a comment pasted on Facebook.

A short distance away in the occupied West Bank, few Palestinians appeared to believe that Obama’s appeal would bring swift results and expressed disappointment that Washington did not appear ready to apply effective pressure on Israel.

DASHED HOPES

Direct peace talks between the two sides broke down in 2010, with the Palestinians walking away from the table when Israel refused to extend a partial freeze on settlement building.

“Certainly U.S. policy is biased toward the Israeli position,” said Tayseer Khaled, a member of the executive committee of the Palestine Liberation Organization (PLO).

“President Obama did not say what is required of Israel and did not take a clear position on settlements and the borders of the Palestinian state.”

Palestinian hopes that Obama would change the dynamics of their decades-old conflict with Israel soared in 2009 when he made a speech in Cairo openly denouncing Israeli settlements.

The address in the Egyptian capital was portrayed as a “new beginning” in relations between the United States and the Muslim world. But four years on, students in Cairo expressed disappointment.

“Obama undertakes policies that show more understanding of the Islamic world, but he did not achieve anything for the Palestinian cause,” said Mohammed Abdel Rahman, a 20-year-old science student at Cairo University.

Obama appealed directly to Israelis to put themselves in the shoes of stateless Palestinians, saying Western-backed leaders in nearby Ramallah were ready for meaningful talks.

But Israeli Deputy Defense Minister Danny Danon threw cold water on the idea. “It is clear to us that we all want peace, but the public in Israel understands today that to our regret there is no real partner,” he told Israel radio.

Even some of Obama’s audience, while welcoming his warmth and wit, questioned his vision of hope.

“I agreed with a lot of the things he said, but there was also a lot of unrealistic optimism,” said Tal Ginzberg, 25, a student at Ben Gurion University in Beersheba.

“He is right that the Palestinians deserve their own state, but he ignores the fact that they are led by terrorist groups.”

The Palestinian leadership in the West Bank has renounced violence, but has said it will not return to negotiations unless Israel halts the settlement building.

Wasel Abu Yousef, a senior PLO leader in Ramallah, said he had heard nothing in the past two days to make him optimistic. “Obama’s visit provides no clear way forward for a serious solution to the conflict,” he told Reuters.

(Additional reporting by Ayman Samir in Cairo, Noah Browning and Ali Sawafta in Ramallah, Allyn Fisher-Ilan and Dan Williams in Jerusalem)

While the new line-up includes more moderates than in the outgoing government, the predominance of legislators who are either settlers or among their staunchest supporters could hamper any efforts to revive Israeli-Palestinian peace talks.

But, presenting his new government to parliament and using a phrase he has used in past major policy speeches, Netanyahu said his administration “extends its hand in peace” to the Palestinians.

“With a Palestinian partner who is willing to conduct negotiations in good faith, Israel will be prepared for a historic compromise that will end the conflict with the Palestinians forever,” he said, repeating a pledge he made at the start of short-lived peace talks in 2010.

New Defense Minister Moshe Yaalon, a member of Netanyahu’s Likud party, opposes any curbs on settlement-building that Palestinians say must stop before they can return to the U.S.-sponsored negotiations, which collapsed over the issue.

Israeli construction in the occupied West Bank, territory which the Palestinians want along with East Jerusalem and the Gaza Strip for an independent state, must be signed off by the Defense Ministry.

Yaalon’s predecessor, Ehud Barak, who headed a center-left party but did not run in the January 22 election, was often accused by settlers of impeding settlement projects.

“The incoming defense minister, Moshe Yaalon, has sworn allegiance to Judea and Samaria,” Nahum Barnea, a political commentator for the Yedioth Ahronoth daily, wrote, using the Biblical names for the West Bank.

Palestinians say that Israeli settlements, considered illegal by most countries, will deny them a viable state.

OBAMA VISIT

The settlement issue, along with Iran’s nuclear program, are likely to figure prominently in talks this week in Jerusalem between Netanyahu and Barack Obama, who will be visiting Israel and the West Bank for the first time as U.S. president.

“We face very great threats. Iran continues in its race to obtain an atomic bomb. It continues to enrich uranium in order to produce a bomb,” Netanyahu told parliament.

“At the United Nations, in September, I presented a red line. Iran has not crossed it but it is approaching it,” he said, repeating an assessment he has voiced in recent months.

“It must not be allowed to cross this line,” he reiterated, referring to the accumulation of sufficient fuel for a potential first bomb.

Netanyahu has said Iran could reach that stage by this spring or summer. Obama said last week it would take Iran more than a year to produce one.

The Islamic Republic denies seeking nuclear weapons, saying it is enriching uranium only for electricity and medical uses.

After weeks of coalition negotiations, Netanyahu signed pacts with the centrist Yesh Atid and far-right Jewish Home parties on Friday, clinching a parliamentary majority.

Sixty-eight lawmakers, the exact size of Netanyahu’s coalition, out of 120 voted to ratify the new government, the first in a decade to exclude ultra-Orthodox Jewish factions that are at odds with Yesh Atid and Jewish Home over reducing state benefits for religious families and institutions and limiting military draft deferments for seminary students.

Among the top new ministers in the cabinet are Yair Lapid, a former TV news anchor whose Yesh Atid party came in a surprise second to Netanyahu’s right-wing Likud-Beitenu list, and Naftali Bennett, a former settler leader and head of Jewish Home.

Netanyahu’s new housing and construction minister, Uri Ariel, is a settler himself and member of Jewish Home. He said on Sunday the new cabinet would continue to expand settlements “more or less as it has done previously”.

Asked about Ariel’s comments, White House spokesman Jay Carney told reporters in Washington:

“Our general position is that unilateral actions that make it more difficult to engage, to resume face-to-face negotiations, direct negotiations, are not things that we view favourably.”

Several months ago, Israel announced plans to build more than 11,000 new houses in the West Bank and East Jerusalem, almost double the 6,800 it has erected since March 2009 when Netanyahu took office, the anti-settlement Peace Now group said.

Some 500,000 settlers and about 2.5 million Palestinians live in the West Bank and East Jerusalem, which Israel captured along with the Gaza Strip in the 1967 Middle East war.

(Additional reporting by Matt Spetalnick in Washington; Writing by Maayan Lubell and Jeffrey Heller; Editing by Jon Hemming)