"This is an increase of 25 percent for the military aid to Israel from the United States. I think this is a significant and important improvement of the defence aid to Israel," Olmert told reporters.

The aid boost has been widely seen as a U.S. bid to help allay Israeli concerns over a package of arms sales, that could be worth some $20 billion over the next decade, which Washington is preparing for Saudi Arabia and other Gulf states.

"We understand the United States' need to assist the moderate Arab states, which are standing in one front with the United States and us in the struggle against Iran," Olmert said, referring to Tehran's nuclear programme.

A U.S. defence official said on Saturday the Bush administration hoped to present the regional package to the U.S. Congress for approval later in the year.

Washington is striving to assure Gulf allies, worried by the growing strength of Iran and war in Iraq, that the United States is committed to the region and will stand by them, with arms sales part of that process, U.S. officials say.

The package for Saudi Arabia would upgrade its missile defences and air force and increase its naval capabilities, the official said.

The United States also is preparing a package of military assistance worth some $13 billion in the next decade for Egypt, another U.S. ally in the Middle East, a senior State Department official said.