JERUSALEM - THE Israeli finance ministry unveiled a US$2.8 billion (S$4.2 billion) plan to restore faith in banks and pension funds on Tuesday after widespread criticism of an earlier economic bailout package.

The ministry said the plan would be implemented in four steps, starting with a state guarantee of some US$1.5 billion aimed at shoring up the banks and allowing them to resume lending.

A further US$1.25 billion will be used to set up a capital fund to protect pension funds and bolster the external credit market.

The ministry also plans to establish a system to assist bondholders to reach debt repayment arrangements with bond issuers and to pass new legislation to encourage foreign investment.

The finance ministry already announced a US$5.4 billion package last Wednesday aimed at stimulating the economy and creating jobs to stem rising unemployment.

But that plan ran into criticism from both left and right and it failed to avert sharp falls on the Tel Aviv stock exchange on Thursday and again on Sunday.

'The aim of these steps is to strengthen the Israeli financial market and is in addition to the bailout plan proposed last week which dealt with economic activity,' said a ministry statement announcing the new plan.

'The plan was set up by the ministry, the Bank of Israel and the Israel Securities Authority,' it said.

'The global credit crunch and the financial crisis in general demand such steps be taken.' Israel's main Histadrut trade union confederation sharply criticised the earlier stimulus package for failing to protect pensions savings from the slump in stock market values.

It has threatened a general strike to press its demands for a safety net to protect the savings of those nearing retirement.

Histadrut leaders were meeting on Tuesday to consider whether to declare a dispute which could pave the way for a general strike in two weeks.

The financial crisis has dominated the front pages of the Israeli press in recent days.

The front page of Sunday's edition of Israel's biggest selling newspaper Yediot Aharonot was dominated by an article headlined: 'Safety Net Now,' calling for protection for those nearing retirement.

The article was published inside a large, downward-pointing arrow superimposed against a backdrop of red-coloured numbers, signifying the plummeting stock market.

Israel's main stock index rallied on Monday.

The TA-25 index, comprising the 25 largest Israeli companies by market capitalisation, closed up 5.34 per cent at 623.66 points, after falls of 6.57 per cent and 4.91 per cent on Sunday and Thursday, respectively.

On Tuesday, it was trading up nearly four per cent at around midday (1000 GMT, 6pm Singapore time). -- AFP