After two weeks of high-level negotiations, Israel has averted a potentially crippling general strike as the government's latest economic austerity plan survived its initial test in a showdown with the country's powerful trade unions.

The strike, which was threatened for today by the Histadrut, Israel's national trade union federation, was called off after the negotiations between the labor federation and senior government officials reached agreement at dawn this morning.

The accord set levels of cost-of-living compensation that workers will receive in August and September, partly offsetting erosion of their incomes that will result from the economic austerity measures.

The government also agreed to drop its planned use of emergency regulations to fire up to 10,000 public employes, and instead will continue to negotiate with the Histadrut over the number to be laid off and how it will be done.

The agreement with the Histadrut was an important victory for Prime Minister Shimon Peres and the economic austerity plan he pushed through the Cabinet July 1. Peres said at the time that the Israeli economy faced "total collapse" without the actions, which included a big currency devaluation, a sharp cut in government subsidies and a three-month wage and price freeze.

The Histadrut responded by calling a 24-hour general strike, and then began negotiations while threatening to impose an open-ended general strike if the talks failed. Had that happened, the economic austerity plan -- the third by the national unity government since it came to power in September -- might have collapsed before it was implemented.

But the price of reaching the accord with the labor federation will be to dilute the impact of the economic austerity program because of the higher cost-of-living provisions.

Peres today hailed the agreement with the Histadrut as an important step toward ending Israel's steady economic decline.

He also said inflation "has already ended" in Israel, although that was far from evident in the June consumer price index figures made public yesterday. The index rose by 14.9 percent last month, less than predicted but still a record rise for any June in Israel's history. , represents a "renewal of the covenant" in their eyes.