ANKARA (Reuters) - Turkey said on Tuesday it was freezing defence trade with Israel and stepping up naval patrols in the eastern Mediterranean , highlighting a potentially destabilising rift between the two major U.S. allies in the Middle East.
Prime Minister Tayyip Erdogan's threat to send warships into waters where Israel's navy operates raises the risk of a naval confrontation between two powers whose friendship soured because of Turkish outrage over Israeli policies towards Palestinians.
"The eastern Mediterranean is not a strange place to us. Aksaz and Iskenderun -- these places have the power and opportunity to provide escorts," Erdogan told reporters in Ankara, referring to two Turkish naval bases. "Of course our ships will be seen much more frequently in those waters."
Asked about his remarks, an Israeli government official, speaking on condition of anonymity, said: "Israel does not want to see further deterioration in its relationship with Turkey."
On Friday, Turkey announced it was expelling Israel's ambassador and other senior diplomats, downgrading relations after the release of a U.N. report on the killing of nine Turks during an Israeli commando raid on an aid flotilla bound for the Israeli-blockaded Palestinian enclave of Gaza last year.
Israel's refusal to apologise for the deaths has angered Turkey, a NATO member with the alliance's second biggest military, and Erdogan's government argues that Israel's blockade of Gaza lacks legitimacy.
Erdogan also said Turkey was preparing more sanctions against Israel, and specifically said defence industry ties would be frozen. "Trade ties, military ties, regarding defence industry ties, we are completely suspending them. This process will be followed by different measures," Erdogan said.
An official at Erdogan's office told Reuters the prime minister was referring to military and defence trade ties only, not overall trade, which last year reached a total bilateral volume of $3.5 billion.
Economy Minister Zafer Caglayan said on Monday Turkey would do nothing "for now" to change its economic ties with Israel.
According to the Stockholm International Peace Research Institute, which monitors arms sales worldwide, Israel delivered 170 rebuilt Turkish M-60A1 tanks to Turkey in a $688 million deal between 2005 and 2010. It also sold 10 Heron drones to Turkey in 2010 for $183 million.
CYPRUS GAS DEALS
Israel has expanded patrols in the eastern Mediterranean to enforce a blockade on Gaza it says is needed to prevent arm smuggling to the Palestinian Islamist movement Hamas and for fear of Lebanese Hezbollah militant attacks on gas platforms.
Turkish media reported that Erdogan held a meeting with Turkey's chief military commander, General Necdet Ozel, on Tuesday to discuss developments with Israel.
Some Turkish and Israeli commentators have suggested Turkey might use the feud with Israel to build up naval patrols in seas between the Jewish state and the divided island of Cyprus.
Turkey has bitterly complained about recent Cypriot-Israeli energy deals and the presence of Turkish ships would have a menacing effect.
Turkey and Cyprus have been at odds for decades over the ethnically split island, whose internationally recognised Greek Cypriot government is an EU member. Turkish Cypriots live in a breakaway state in northern Cyprus only recognised by Turkey.
Asked about exploratory drilling for natural gas by Greek Cypriots, Egemen Bagis, Turkey's European Union minister, told Turkish media last week: "I t is for this (reason) that countries have warships. It is for this (reason) that we have equipment and we train our navies."
Israeli Defence Minister Ehud Barak, in remarks broadcast before Erdogan's announcement on Tuesday, urged the two states to act with calm. "Israel and Turkey are the two strongest and in many respects the most important countries in the Mideast.
"We have our differences, but in differences too it is important that both sides act using their heads and not their gut -- that will be best for us all and best for regional stability and restoring things," said Barak.
Erdogan also said he might visit Gaza during a planned trip to nearby Egypt, but would decide after consulting the Egyptian government. Erdogan plans to visit Cairo later in September.
He will also attend the U.N. General Assembly in New York later this month where he is likely to speak strongly in support of Palestinian efforts to win U.N. recognition for a state they aim to create in Gaza and the Israeli-occupied West Bank.
As its relations with Israel have deteriorated, Muslim Turkey has racheted up diplomatic support for the Palestinians.
Foreign Minister Ahmet Davutoglu, speaking at a joint news conference in Ankara with Nabil Shaath, an envoy of Palestinian President Mahmoud Abbas, said on Monday the recognition of a Palestinian state was "the most natural right of Palestinians, a debt the world must pay to the Palestinian people."
Turkey plans to apply this week to the International Court of Justice for an investigation into the legitimacy of the Israeli blockade of 2 million Palestinians in Gaza.
Turkey has also said it will also seek prosecution of Israeli officials responsible for the killing of the pro-Palestinian activists aboard the Mavi Marmara ship.
Israel says it regrets the loss of life, but maintains that its naval commandos defended themselves against violent activists after boarding the vessel.
(Reporting by Pinar Aydinli and Ibon Villelabeitia in Ankara, Ece Toksabay in Istanbul, Jeffrey Heller, Allyn Fisher-Ilan and Maayan Lubell in Jerusalem; Writing by Simon Cameron-Moore and Ibon Villelabeitia; Editing by Mark Heinrich)