Israel's feuding government leaders on Monday avoided plunging the country into its fourth election in less than two years, postponing a deadline for passage of a national budget.

Prime Minister Benjamin Netanyahu and his main coalition partner, defence minister Benny Gantz, have been at odds over whether a one-year or two-year budget should be passed, with a second wave of Covid-19 infections fuelling an economic crisis.

Failure to approve a budget in parliament by August 25 would have automatically triggered an election by law, but Netanyahu's right-wing Likud and Gantz's centrist Blue and White party agreed to push the deadline ahead by 120 days.

Parliament ratified the postponement in a vote two hours before the original deadline had been due to expire at midnight.

The delay will give Netanyahu and Gantz more time to try to resolve the weeks-old dispute that is also weighing on the power-sharing accord they reached after an election in March, which followed inconclusive ballots in April 2019 and September 2019.

Under that agreement, Netanyahu, now in his fifth term and on trial on corruption charges that he denies, is due to hand over his post to the former general late next year.

Speculation had been high in Israel that Netanyahu would opt to allow the original budget deadline to expire so that a new election would be held.

Under that scenario, he would by law remain caretaker prime minister until after a new election in November. Under the coalition agreement, if the government breaks up for any reason other than a budget impasse, Gantz becomes caretaker premier.

Just before the vote Netanyahu posted a video on Facebook saying he would “do the right thing — prevent unnecessary elections”.

Gantz held a press conference warning the situation was so tense in Israel that with new elections there would be “blood in the streets”.

Opinion polls show a sharp decline for Gantz's party but the resurgence of coronavirus infections and Netanyahu's legal troubles have also cut into the veteran leader's popularity amid a wave of street protests calling for his resignation.

Ratings agencies have cautioned that further budget delays would raise concerns about Israel's ability to implement prudent fiscal policies and could affect credit ratings.

Israel's economy has entered a recession and is forecast to shrink some 4.5% in 2020, while the jobless rate is at 12.3% due to a March-April lockdown. — Reuters