JERUSALEM, OCT. 29 -- Prime Minister Yitzhak Shamir warned Iraq today not to "lay a finger on Israel" lest President Saddam Hussein "pay a terrible price for his blunder."

Shamir told Jewish fundraisers at the Hyatt Regency Hotel in Jerusalem, "Our very presence in this region, thanks to our strong will and capacity, {has} been and continues to be a force for stability, a barrier that prevented many military adventures and much more violence."

He reassured the audience that Saddam's attempts to coax Israel into the conflict in the Persian Gulf would fail. "Saddam Hussein must surely know that if he lays a finger on Israel he will pay a terrible price for such a blunder," Shamir said. "This attempt to drag us into the present conflict . . . will not succeed."

Saddam has threatened to torch Israel with chemical weapons. His first threat came in April when he said he would use chemical weapons in answer to an Israeli nuclear attack. He later said an American attack would also lead to an attack on Israel.

The Israeli government has taken these threats seriously and has distributed gas mask kits to the general public.

Finance Minister Yitzhak Modai, meanwhile, announced economic changes that included an additional military budget of $250 million in light of the gulf crisis, Israel army radio said.