Iran war could cost Israel economy $42 billion: report

JERUSALEM (Reuters) - Israel's economy would incur damages of as much as 167 billion shekels ($42 billion) should Israel attack Iran over its nuclear program, business information group BDI-Coface has projected.

Direct economic damage would reach 47 billion shekels, BDI-Coface, a respected research group, said on Tuesday. That would be equivalent to 5.4 percent of Israel's gross domestic product last year.

Indirect damages would amount to 24 billion shekels a year for three to five years due to the collapse of businesses, it said.

There has been an upsurge in rhetoric from Israeli politicians this month suggesting the country might attack Iran's nuclear facilities ahead of U.S. presidential elections in November.

Israel, widely believed to be the only atomic power in the Middle East, views Iran's nuclear program as an existential threat, citing threats made by leaders of Islamist Iran to destroy the Jewish state.

BDI noted that 32 days of war with Lebanon in 2006 led to a 0.5 percent reduction in Israel's economic growth. Direct costs such as civil property and infrastructure damage cost the economy another 1.3 percent.

"In the event of a war of the same magnitude, duration and damage, it is possible to expect damage of 16 billion shekels," it said.

The war with Lebanon took place mainly in Israel's north, which produces just 20 percent of the country's output.

"It is reasonable to assume that in the event of a war, it would also involve the center of the country, which produces 70 percent of Israel's economic activity," BDI said, noting Israel's gross domestic product was 870 billion shekels in 2011.

Bank of Israel Governor Stanley Fischer warned this month of an economic crisis in the event of a war with Iran.

Prime Minister Benjamin Netanyahu is frustrated that Western diplomacy to try to force Iran to rein in its nuclear program has so far proved fruitless.

Senior Israeli officials have said a final decision about whether to attack Iran has not yet been taken, with the military hierarchy unhappy about the prospect of going it alone without full U.S. backing.

($1 = 4.02 shekels)

(Reporting by Steven Scheer; Editing by Susan Fenton)