Israeli Chief of Staff Lt. Gen. Benny Gantz last week ordered commanders to prepare for what The Jerusalem Post calls "a near-shutdown of the military in two months" because of cutbacks demanded by the Finance Ministry.
The Globes business daily said 700 career officers and senior non-commissioned officers in all service branches will be sacked over the next few months because of the cutbacks of an initial $800 million for fiscal 2012, with more expected.
"A number of strategic projects will be harmed," the Post quoted a senior officer as saying.
"We're canceling all kinds of exercises, from division-level down to battalion level," said another who attended Gantz's meeting of the top brass, from colonel on up.
"We won't be able to call up reserves and even when we hold exercises we'll be limited in the amount of live ammunition we can use."
The Post has also reported that the army "has decided to suspend all future orders of the new Merkava tanks and Namer APCs."
The 65-ton Merkava, which entered service in 1978, is designed by the Merkava Tank Office and assembled by the Israel Ordnance Corps.
Among the key contractors involved in production are Elta, which supplies electronic sensors and infra-red optics; Rafael Advanced Defense Systems, which makes the Trophy active protection systems to counter rockets and missiles; and El-Op an Elisa, the optics and laser warning system.
The Namer, in which the U.S. Army has shown interest, is based on the Merkava Mark 4 chassis and is intended as the Israel army's main fighting vehicle. The decision to develop the new APC, which is said to have improved reinforced steel protection, was made after the 2006 war with Hezbollah in which Israeli armor took heavy losses from anti-tank missiles.
All told, orders for components from 200 Israeli companies will be canceled.
Other strategic projects that are being affected are the Iron Dome missile-defense system designed by Rafael to intercept short-range missiles and artillery rounds.
The development of the David's Sling system, designed to shoot down medium-range missiles, and the Arrow-3 missile which is intended to target ballistic missiles outside Earth's atmosphere, are also likely to be affected.
David's sling is being built by Rafael. The long-range Arrow is being developed by state-owned Israel Aerospace Industries, flagship of Israel's defense sector.
The United States, which has paid half of the $3 billion cost of developing the Arrow system, agreed in 2011 to fork up $235 million for Arrow-3 and David's Sling development.
But the Israelis say 1.3-ton Arrow-3, the country's main defense against Iranian Shehab-3 intermediate-range ballistic missiles, will need $3.9 billion for the Arrow program over the next few years.
Gantz and Defense Ministry Director General Udi Shani are to meet with Prime Minister Binyamin Netanyahu in the coming weeks in a bid to secure additional funds to allow the military to implement its new five-year procurement plan.
That plan is undergoing major changes these days.
The Post reported that it "was supposed to continue the upgrade of recent years to the military's ground forces and at the same time improve its strategic capabilities with the procurement of additional F-35 stealth fighter jets and also lead to a boost in Israel's cyberwarfare capabilities."
In October 2010, Israel ordered an initial batch of 20 of F-35s from Lockheed Martin at a cost of $2.75 billion.
Given development problems and hefty cost over-runs, Israel may not take delivery of the first F-35s until 2017, two years later than anticipated.
Ultimately, Israel wants 75 of the fifth-generation fighters to maintain its long-held aerial superiority in the Middle East.
But with the budget cutbacks on top of Lockheed Martin's troubles, the air force has been examining the alternative of buying second-hand Boeing F-15s from the U.S. Air Force to fill the gap.
The five-year plan was formulated on the premise that Israel would have to fight a multi-front war sometime in the next few years and one in which the planned four-tier missile-defense shield would be a vital component.