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With an expected boost in U.S. funding, Israel plans to step up production of Arrow missile interceptors to expand its missile defense system, diplomats and defense analysts said on Friday.

Components for the Arrow missiles would be produced in the United States under a deal between state-owned Israel Aircraft Industries and U.S. aerospace giant Boeing Co.

The Arrow system is one of the centerpieces of the U.S.-Israeli strategic relationship. It was designed to intercept and destroy Scud-type missiles, similar to the ones Iraq fired at Israel during the 1991 Gulf War.

While the U.S. invasion of Iraq has eliminated that threat, Israeli officials say Syrian Scuds and Iran's faster and longer-range missiles still pose a serious threat.

"We will be increasing production in a substantial way," one Israeli source said after talks in Washington between U.S. and Israeli missile defense officials.

The Defense Department is expected to include funding for U.S.-based production in U.S. President Bush's fiscal 2005 budget, people close to the Israeli government said.

But administration officials said no final decisions have been made and that the program may not make it into the final budget, which will be sent to Congress on Feb. 2.

If approved, the U.S. money would help Israel double the rate of Arrow production, according defense analysts. The missiles would then be deployed in Israel.

But the Arrow system also yields a wide range of technical and operational data that benefit other U.S. weapons programs.

Chicago-based Boeing is responsible for building about half of Arrow missile components under the agreement signed with Israeli Aircraft Industries in February. IAI, the primary contractor, is responsible for integration and the missile's final assembly in Israel.

Boeing declined comment. A spokesman for Israeli Aircraft Industries in Washington said the United States had funded about 70 percent of development costs of the Arrow missile.

Israel carried out a successful test of the Arrow last month. Sometime next summer, Israel and the United States are expected to carry out another test -- this time in the United States using a real Scud missile as the target, analysts said.

In fiscal 2004, which began Oct. 1, 2003, Congress appropriated $154.8 million for the Arrow, up from $145.7 million the year before, according to Rick Lehner, a spokesman for the Pentagon's Missile Defense Agency.

The slender, 23-foot (7-meter)-long Arrow is tailored to detect, track and destroy a missile in under three minutes at altitudes of more than 30 miles, its designers say.

Military sources said Israel had more than 200 Arrows -- costing $3 million apiece.

The Arrow began as an Israeli demonstration model submitted to then-U.S. President Ronald Reagan's Strategic Defense Initiative, popularly known as "Star Wars," during the late 1980s.

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