"Demand for credit is small because investment is shrinking and companies are either downsizing or closing," said independent Palestinian economist Samir Abdallah.

Fearful of being hit with US anti-terrorism sanctions and lawsuits, banks have refused to deal with the Hamas government since the Islamist movement took office in March.

At the same time, tighter credit requirements for government workers, who have not been paid full salaries for around seven months, and a dramatic contraction in economic growth this year, have shrunk other banking business.

The World Bank has estimated growth per capita in the Palestinian territories would fall by 27 per cent this year because of the aid embargo and Israeli restrictions on movement. "Our big concern is to recover our debts and not to give credit," said a senior banker in Jenin.

Despite the crisis, financially banks are fairly sound, said the Palestine Monetary Authority, which acts as a central bank. Its figures show total cash deposits of $4.1 billion in August, compared to $4.2bn last December, the month before Hamas won elections.

While many customers, mainly government workers, have withdrawn their savings, remittances from Palestinians overseas have increased, bank officials say.

The officials say they are encouraging banks to increase their capital as a cushion against further shocks.

Total bank capital has grown to $424 million in the past 18 months from $316m, they added. But economic experts warned that the banks need to be able to build their loan books and earn fees from transactions.

Germany's Defense Ministry said an incident had occurred, without giving details.

The German daily Der Tagesspiegel quoted a German junior defense minister as telling a parliamentary committee two Israeli F-16 fighters had flown low over the ship, firing twice.

The jets also activated infra-red countermeasures to ward off any rocket attack, the paper quoted him as saying, in an advance release from Thursday's edition.

"There was no such incident," an Israeli military spokeswoman said.

She said the German statements appeared to refer to an incident that took place on Tuesday. Jets were scrambled when a helicopter took off from a German aircraft carrier close to Israeli waters without identifying itself.

The planes realized the mistake, did not engage the helicopter and returned home, the spokeswoman said.

Germany assumed command of a United Nations naval force off Lebanon 10 days ago, and has sent eight ships and 1,000 service personnel to join the international peace operation in the region.

The naval force is charged with preventing weapons smuggling and helping maintain a ceasefire between Israel and the Lebanese Islamic militant group Hezbollah.

The sources added that another Palestinian, this time from Beit Hanoun, died as a result of injuries sustained during the morning's incursion. Eyewitnesses say that a Palestinian Red Crescent ambulance took the injured man to a nearby hospital, where he was pronounced dead upon arrival. Another Beit Hanoun resident was severely injured when an Israeli sniper stationed at a checkpoint shot him in the chest. The injured man is currently undergoing surgery and is in "serious" condition.

In related news, Palestinian security sources report that additional Israeli forces have been deployed to the Rafah border crossing between Egypt and the Gaza Strip. Israeli bulldozers have begun excavating land near the crossing on the pretext of searching for underground tunnels.

Alzerba noted that during his last visit to the prison nearly a year ago, the living conditions were deplorable. He stated, "The prisoners being detained in each cell are double that of the cell's capacity. Most cells designed to hold three prisoners were holding six or more."

Mahmoud Khaddrg, a recent prisoner who was held in custodial arrest for more than fifty days, expanded on the situation. He noted, "Many of the prisoners in Qadumim strike because of the harsh living conditions. For example, prisoners were only allowed to go to the restroom only three times a day. Those who had to go more often were forced to urinate into plastic bottles."

Established in the mid-1990s, Qadumim prison is especially notorious for the declining health of its occupants. Prisoners are said to have suffered from scourge, constipation, chronic pain in the abdomen, anemia, and various skin diseases as a result of poor living conditions and neglect and abuse.

The town of Kabatiya saw several incursions during the holiday festivities. On the eve of the final day of Eid, Israeli forces raided the home of the Barah family. According to family members, the soldiers spent several hours carelessly searching the house and checking the identity of all the household residents. Then, they arrested one of the male family members on the pretext of belonging to Islamic Jihad, and took him to an unknown location.

In another incident in Kabatiya, Israeli forces surrounded the family home of Majdi Alawneh. The troops ordered everyone out of the house and restrained its residents, arresting Alawneh's brother. Next they stormed the house, recklessly destroying furniture and belongings, while giving no explain for their actions.

Similar incidents were commonplace in the northern West Bank town of Tubas over the holiday. On one evening, more than 20 Israeli vehicles rolled into the town, while the soldiers proceeded to raid homes with no excuse or reason. Faris Youssef, an eyewitness to the incursion, told PNN that when he questioned the soldiers about their presence, he was told that the raid was a "gift" for the holidays.

One Tubas resident noted that Israeli forces surrounded his home and began shooting for no apparent reason. He stated, "The children in the house were frightened by the shooting, but not as frightened as they were when the Israeli stormed in to arrest my son Sameeh."

Assaults at Israeli checkpoints were also on the rise during the holiday. In one case, a young man from Jenin named Jamal Moussa was brutally assaulted by Israeli soldiers. He told PNN, "When I reached the checkpoint, one of the soldiers asked me why I was wearing a suit. I told him that I was celebrating Eid al-Fitr. He then threw me on the ground and deliberately tore my clothes."

Where he is seen as overstepping the mark is in arguing that the state should strip up to a quarter of a million Palestinians living inside Israel of their citizenship and seal them and their homes into the Palestinian ghettoes being created inside the West Bank (presumably in preparation for the moment when they will all be expelled to Jordan). He believes any remaining Arab citizens should be required to sign a loyalty oath to Israel as a "Jewish and democratic state" -- loyalty to a democratic state alone will not suffice. Any who refuse will be physically expelled from Israel.

And, as a coup de grace, he has recently demanded the execution for treason of any Arab parliamentarian who talks to the Palestinian leadership in the occupied territories or commemorates Nakba Day, which marks the expulsion and permanent dispossession of the Palestinian people in 1948. That would include every elected representative of Israel's Arab population.

These are Lieberman's official positions. Apparently unofficially he wants even worse measures taken against Palestinians, both inside Israel and in the occupied territories. In May 2004, for example, he told a crowd of his supporters, in Russian, that 90 per cent of the country's Arab citizens should be expelled. "They have no place here. They can take their bundles and get lost." His speech could have had second billing with one by Adolf Hitler at a Nuremberg Rally.

Despite Lieberman's well-known political platform, Olmert has been courting him ever since Yisrael Beiteinu (Israel is Our Home) upset the expected three-way struggle between Olmert's Kadima party, Labor and Likud in the March elections. Lieberman romped home with 11 seats in the Knesset, making his party a sparring partner of both Likud and the popular religious fundamentalist party Shas.

According to reports in the Israeli media, Lieberman has not joined the coalition until now because he has been playing hard to get, making increasing demands of Olmert before agreeing to sign up for the government. His hand has grown stronger too: according to opinion polls, he is now the most popular politician in Israel after Binyamin Netanyahu, leader of the Likud party.

In the newly established post of Minister for Strategic Threats, Lieberman -- the avowed Arab hater -- will shape Israel's response to Iran, leading the chorus threats being made by Israel that the country is only a hair's breadth from dropping bombs, possibly nuclear warheads, on Tehran. After that, he will presumably help the government decide what other "strategic threats" it faces.

While Olmert enthuses over Lieberman, most in the Labor party seem quietly resigned to his inclusion. Labor's elder statesman and former leader, Shimon Peres, says he has no objections, so long as Lieberman does not challenge the core policies agreed by Kadima and Labor. This, of course, is precisely what Lieberman is doing -- it was the price of the bargain he struck with Olmert. Lieberman wants no peace overtures to the Palestinians, and favours the hardline neoliberal economic policies pursued by Kadima.

On Wednesday the Labor leader Amir Peretz, a supposed socialist and former head of the Israeli trade union movement, accepted Lieberman's entry to the coalition, as Olmert surely knew he would. In typical Labor style, Peretz bought off his conscience by insisting on a package of modest benefits for Arab citizens, the same Arab citizens Lieberman wants expelled. The last time the government made a similar promise to its Arab minority back in late 2001 -- when the prime minister of the day, Ehud Barak, needed their votes -- the $4 million pledge was broken immediately after the election.

So why are Israel's politicians, of the left and right, so comfortable sitting with Lieberman, the leader of Israel's only unquestionably fascist party? Because, in truth, Lieberman is not the maverick politician of popular imagination, even if he is every bit the racist -- a Jewish Jorg Haider or Jean Marie Le Pen.

In reality, Lieberman is entirely a creature of the Israeli political establishment, his policies sinister reflections of the principles and ideas he learnt in the inner sanctums of the Likud party, a young hopeful immigrant rubbing shoulders with the likes of Ariel Sharon, Binyamin Netanyahu and, of course, Ehud Olmert.

From their political infancy, the latter three were schooled in the minor arts of Israeli diplomacy: feel free to speak plainly in the womb of the party; speak firmly but cautiously in Hebrew to other Israelis; and speak in another tongue entirely when using English, the language of the goyim, the non-Jews.

But Lieberman, who arrived in Israel as a 21-year-old, was not around for those lessons. He imbibed nothing of the principles of "hasbara", the "advocacy for Israel" industry that has its unpaid battalions of propagandists regularly assaulting the phone lines and email inboxes of the Western media. He tells it exactly as he sees it, even if mostly in Russian.

Inside the Likud party, his political training ground, that hardly mattered. He rapidly rose through the ranks to become director-general of Likud from 1993-96 and soon afterwards to head the office of Prime Minister Binyamin Netanyahu. For many years he was the darling of the Likud, a party that today exists in two halves: its original incarnation, once again led by Netanyahu; and the renovated, sleeker model, Kadima, founded by Sharon.

But it was in breaking from Likud and founding his own party, Yisrael Beiteinu, in 1999 that Lieberman finally found his voice outside the Likud's smoke-filled rooms. The audience for his message was as untutored in the deceits of Israeli politicking as Lieberman himself.

Lieberman immigrated to Israel from Moldova in 1978, leading the vanguard of a wave of immigration from Russia and its satellite states that reached a peak in the early 1990s as the Soviet empire broke up. By the time most Russian speakers began pouring into Israel, Lieberman was already well esconced in the Israeli political system.

Yisrael Beiteinu's openly racist agenda spoke to the darkest instincts of the one million newly arrived Russian speakers.

Many of them poor and struggling to adapt to Israeli culture, they live far from the prosperous centre of the country in their own neglected ghettos, Little Moscows, where the signs and street language are more than a decade later still in Russian. They feel little affinity for the Jewish state -- apart from a loathing for everything Arab.

The state has found it easy to manipulate these immigrants' emotions. They have little understanding of the historic reasons for Israel's conflict with the Palestinians, and like other Israelis learn almost nothing more at school. With no context for appreciating why the Palestinians might carry out suicide attacks, Russian speakers assume the Palestinians are simply the hate-filled barbarians described to them by their politicians.

When young Russian men do their three years of active duty in the occupied territories, all these prejudicies are confirmed. Now one of the largest blocs of Israel's citizen army, the Russians are assigned some of the toughest spots in the West Bank and Gaza, often their first experience of meeting "Arabs".

When they return home, they find it hard to make sense of Israeli officialdom's lip service in distinguishing between Arab citizens, who have some rights in the Jewish state, and the "Arabs" of the occupied territories, who have none. Many Russian speakers wonder why Israel does not simply kill or expel the lot of them.

And this is where Lieberman steps in. Because usefully this is exactly what he not only believes but also openly declares. Lieberman can tap the support of nearly a million voters, a huge reservoir of support for any prime ministerial hopeful trying to assemble the coalition needed to form a government under the fractious Israeli political system.

Neither Olmert nor Netanyahu can afford to say what is really on their minds: that they want to cleanse the region of as many Palestinians as they can manage -- most certainly those in the occupied territories, and later the even bigger nuisance of the ones who have citizenship and undermine Israel's Jewishness.

But instead they can let a Lieberman, the charismatic leader of a popular party who does dare to say these things, join the government with minimal damage to their own reputations.

They can also let him use the platform provided by a cabinet position to shape a new coarser political language in which ideas of expulsion and transfer become ever more mainstream. Until one day the policies Lieberman advocates, reflections of the values he imbibed during his long years spent in Likud, become acceptable enough that a Prime Minister -- Olmert or Netanyahu or Lieberman himself -- will be able to put them in the government's programme.

Instead of using words like "disengagement", "convergence" or "realignment", Israel's politicians of the near future may simply call for the expulsion of Arabs, all Arabs.

Even now they do little to conceal the fact that such thoughts are uppermost in their minds. Netanyahu, currently Israel's most popular politician and leader of the opposition, has repeatedly called the 1.2 million Arab citizens of the country a "demographic timebomb". Back in 2002, for example, he told an audience of policymakers: "If there is a demographic problem, and there is, it is with the Israeli Arabs who will remain Israeli citizens We therefore need a policy that will first of all guarantee a Jewish majority."

Unlike Lieberman, Netanyahu never spells out what policies he is advocating. But most Israelis understand that in practice, if he felt free to speak his mind, his platform would not look much different from Yisrael Beiteinu's.

Olmert too uses code words readily understood by his Israeli audiences. In late 2004, in an interview with the Haaretz newspaper, he said: "There is no doubt in my mind that very soon the government of Israel is going to have to address the demographic issue with the utmost seriousness and resolve. This issue above all others will dictate the solution that we must adopt." He added that he feared the Palestinians would soon be a majority in the area comprising both the occupied territories and Israel, and that then they could launch a "dangerous" struggle for "one-man-one-vote" similar to the one against apartheid in South Africa. He concluded: "For us, it would mean the end of the Jewish state."

What "solution" was Olmert referring to? Israelis know only too well. Every year since 2000 Olmert, Netanyahu, Peres and other senior policymakers have been meeting at the Herzliya conference, near Tel Aviv, to draw up ideas about how to deal with the demographic threat: the rapidly approaching moment when the Palestinians, either those with Israeli citizenship or the non-citizens living under military occupation in the West Bank and Gaza, will outnumber Jews.

The solutions they have proposed have been similar to Lieberman's. Both the disengagement from Gaza and the planned limited withdrawals from the West Bank came out of Herzliya. But so did a range of measures to deal with the country's Arab citizens: land swaps to lose areas of Israel densely populated with Arabs in return for the settlements in the West Bank; loyalty oaths as a condition of citizenship; stripping the Arab population of their right to vote; and forcing all political parties to subscribe to Zionist ideals.

These are not fanciful ideas; they are now firmly in the mainstream. Israel already has legislation requiring all parties running for the Knesset to support Israel remaining a "Jewish and democratic state". Technically, the only non-Zionist parties -- two Arab parties and the small joint Jewish and Arab Communist party -- could quite legally be disqualified from all general elections under the current legislation. They expect that at some point in the near future they will be too.

The two previous prime ministers, Ehud Barak and Ariel Sharon, both secretly favoured land swaps in which large numbers of Arab citizens would be removed from the Jewish state. Barak proposed such a scheme at Camp David in the summer of 2000, as several participants later confirmed. And in February 2004 Sharon floated the same idea during an interview in the Maariv newspaper. When it caused a storm, he backtracked, but investigations by the paper revealed that he had been formulating a land swap for some time with his advisers and had even consulted the then Labor leader and his foreign minister, Shimon Peres, on its feasibility.

At the top of Lieberman's list of demands before agreeing to enter Olmert's coalition are major changes to Israel's constitution, including the introduction of a presidential system to replace the current parliamentary system. Israel already has a President, currently Moshe Katsav, who is facing a string of rape and sexual harassment allegations, but the post is entirely symbolic.

Lieberman wants a president who has the authority to make major legislative changes, even constitutional ones, without having to make the backroom compromises to keep together the coalition governments that characterise Israel's current political system. The president Lieberman has in mind would be more on the lines of an autocratic ruler.

Olmert is apparently sympathetic to Lieberman's plans to change the political system. It is not difficult to understand why.