The government, in its weekly cabinet meeting on Sunday, decided to drop price regulation on basic bread and instead grant additional welfare payments to citizens in need.

On Monday, Shas party chairman and Minister of Industry, Trade and Labor Eli Yishai explained the decision as "historic" in that the government can now grant compensation directly to the weaker sectors of society, instead of subsidizing the product for all citizens.

The deal includes an agreement to re-negotiate the measure when the proposed 2008 budget is discussed.

Bakers estimated that the price of bread, once it is freed from price controls, will rise by approximately 15 percent for the basic sliced and whole loaves and for standard Sabbath challahs. 

An earlier price hike, by 12.5 percent, was approved in July after a strike by the government-regulated Angel, Berman and Vadash bakeries left store shelves empty for days. The bakeries said they would not absorb the rise in production costs prompted by a rise in the price of wheat on the international market.

At that time, Knesset Economic Committee chairman Gilad Erdan suggested the option of reimbursing low-income citizens while approving a price hike for the basic staple.

The bakeries pressured the government to allow a second increase in the price of basic bread in September, just in time for the Jewish holidays. The bakeries again blamed an increase in the price of wheat on the international market for the need to raise prices.

Last week, the three bakeries again withheld bread production as a means of pressuring the government to lift the ceiling on price controls for the basic staple. They again cited a sharp increase in the cost of flour and electricity, which has spiked in tandem with higher oil prices. The bakeries also acknowledged there would probably be a drop in sales as a result of the new price structure.

The compensation approved by the government is a one-time payment of NIS 60 to 180 ($15 - $45) to low-income families to cover the cost of the price hike from August through December. The cash subsidy, to be distributed December 1, is expected to cost the state a total of approximately NIS 60 million ($15 million), in place of the subsidies it was paying to the regulated bakeries.  All those who receive income assistance from the National Insurance Institute, including elderly citizens and families who receive child care payments, would receive the sum.

Opponents of the measure say they doubt that most of those affected by the price rise will receive the subsidy.

The bread price hike still requires the approval of Finance Minister Roni Bar-On before it shows up on store shelves.