The mass-circulation Maariv daily reported this week Israel faces losing $55 million in U.S. funding for Arrow-3 -- under development by state-owned Israel Aerospace Industries and the Boeing Co. of the United States -- because of cutbacks in defense spending by the United States and Israel.
The daily said the shortfall would not be covered by an increase in funds by Netanyahu's government, which recently slashed the Defense Ministry's 2014 budget despite fierce opposition by the military.
Israel receives $3.15 billion a year in U.S. military aid, the largest package provided to any U.S. ally.
Uzi Rubin, former director of the ministry's Missile Defense Organization and a staunch advocate of Arrow-3, warned the funding cutback would "categorically" impact on the country's defense capabilities.
The cut is expected to delay development of Arrow-3 and reduce the number of missiles available for defense against Iran's Shehab-3 ballistic missiles and the more advanced Sejjil-2 now under development.
Some sources said the Defense Ministry is expected to cancel orders for the development and procurement of systems by Israeli defense contractors.
Arrow-3 had been expected to become operational in 2014, with four batteries deployed by 2016 and another four to come at an unspecified date. It's not known to what extent the program will now be set back.
The withdrawal of the $55 million is reported to have triggered a "heated debate" within Israel's defense establishment, particularly as Israeli commanders feel the Jewish state could be made more vulnerable if U.S. President Barack Obama secures a possible rapprochement with Iran through its new president, Hassan Rouhani.
Netanyahu has warned that Rouhani's moderate approach since his recent election masks the Tehran regime's hostile intent toward Israel.
The Israeli leader has repeatedly threatened to take military action against Iran's nuclear program which he views as an existential threat to the Jewish state.
He was reported to have been pressured by Washington and his own military commanders into not unleashing airstrikes in 2012. The last thing he would want right now is slowing down development of the Arrow-3.
Netanyahu -- who told National Public Radio in an interview Thursday if a meeting with Rouhani is "offered, I'd consider it, but it's not an issue" -- has generally appeared to be making every effort to torpedo any reconciliation, and he can be expected to press Obama not to impede the Arrow-3 program at this time, particularly as his administration announced in June it was fast-tracking the project.
Arrow-3 is designed to intercept ballistic missiles beyond Earth's atmosphere, including some that could in the future carry nuclear warheads. That makes it the top layer of a four-tier missile defense shield known as Homa, "The Wall," that the Israelis are building primarily to counter Iranian ballistic weapons.
The system is designed to protect Israel's population centers, industry and strategic facilities against long-range missiles and lower-altitude weapons held by Syria and Hezbollah of Lebanon, and short-range rockets possessed by Palestinian militants in the Gaza Strip as well as Hezbollah.
The Arrow series of missiles -- Arrow 1 has been operational since 2000 and at least two batteries of lower-altitude Arrow-2 are currently deployed -- would be Israel's main line of defense if there is conflict with Iran.
The two-stage Arrow-3 interceptor has twice the range of arrow-2, which will provide defense against ballistic missiles at a lower altitude, essentially picking off any that get past Arrow-3.
Israel's Missile Defense Organization and the U.S. Missile Defense Agency successfully conducted Arrow-3's first flight test Feb. 25 over the Mediterranean Sea, presumably from the Palmachim air base south of Tel Aviv.
The United States has played a key role in helping develop the entire Arrow project since it began in the mid-1980s. The program is reported to have cost in excess of $1 billion, most of it U.S. funding.
Washington has been reducing funds for Israeli missile defense programs for a couple of years, though not significantly, Israeli media have reported. The Obama administration requested $121.7 million in 2011, $106.1 million in the 2012 budget proposal and $99.8 million for fiscal 2013.