Hizbullah has gained significant strength in the last couple of years," said Barak during an IDF Armored Corps drill in the North. "We are closely following a possible violation [of the resolution] caused by the transfer of advanced weapons systems from Syria to Hizbullah. The necessary preparations have been made, and regarding all the rest - I always prefer not to talk, rather to take action when the time comes."

Concerning the Georgia-Russia conflict, Barak warned against leaving friends during testing times. "We view Russia as a very important country both on a regional and global scale," he said. "we see Georgia as a country with which we have friendly relations, and Israel, particularly due to its experience, must ensure that it does not rush to leave its friends at a testing time. This is what we have expected from our friends and it is what our friends expect from us," he continued.

Barak's remarks came amid Russian protests over Israeli weapons sales to Georgia.

The Consumer Prices Index (CPI), the Government's preferred measure of inflation, was in line with the expectations of City economists, up from 3.8pc in June, and now stands at its highest level in more than a decade. The Bank's Monetary Policy Committee had access to the July's inflation figures when it decided to hold interest rates at 5pc last week, showing that while inflation remains a threat, MPC members are aware of the growing threat of recession.

Some economists, including Michael Saunders at Citigroup, have warned that there will be no let up for consumers, with CPI inflation now expected to hit 5pc before the end of the year. This makes it unlikely that the MPC will cut interest rates in the immediate future. "The MPC's updated forecast is likely to show both higher inflation and weaker growth than their previous forecast in May. We expect inflation to rise to about 5pc around year end, even though the economy is probably in recession now," said Mr Saunders.

Sarkozy was due to arrive in Moscow at 0910 GMT and meet President Dmitry Medvedev before flying to Georgia on a day of intense diplomacy aimed at ending violence in a region key to international oil transit. Pro-Western Georgia and Russia came into direct conflict over South Ossetia last week after Tbilisi launched an offensive to regain control over the pro-Moscow breakaway separatist region.

Hostilities appeared to broaden as Abkhazia, another Russia-backed rebel region, launched an offensive at dawn on Tuesday to force Georgian troops out of the disputed Kodori gorge, Abkhaz Foreign Minister Sergei Shamba said. "The operation to liberate Kodori gorge has started," he told Russia's Vesti channel. "Our troops are making advances. We are hoping for success."

GEORGIA HOSTS A KEY OIL PIPELINE SUPPLYING THE WEST and the fighting has unsettled oil markets. It has alarmed investors in Russia and has raised fears of a wider conflagration in the volatile region bordering Iran, Turkey and Russia.

Despite warnings by President George W. Bush for Russia to "reverse the course it appears to be on" and withdraw its troops to avert a "dramatic and brutal escalation of violence," U.S. MILITARY INTERVENTION IN THE SMALL FORMER SOVIET REPUBLIC IS NEARLY UNTHINKABLE, analysts said on Monday. There also is little Washington can do diplomatically to restrain the Russians, according to foreign policy experts.

"Let me say at this point that there are no good solutions. Either we have to try to remove them (the Russians) by force or accept a humiliating defeat," said Dimitri Simes, founding president of the Nixon Center in Washington. "It is not a happy situation, and we did not have to have this situation, and I think the (Bush) administration has considerable responsibility for that."

The Bush administration has pushed hard for Georgia to join NATO, against European misgivings and Russian fury at the idea. "Saakashvili was discouraged from attacking Russian troops in South Ossetia but he clearly never was told point blank 'If you do it, you are on your own,'" said Moscow-born Simes, who was an informal adviser to President Richard Nixon.

Fighting raged around Tskhinvali, the capital of the separatist province of South Ossetia. Swarms of Russian planes launched new raids across Georgia, with at least one sending screaming civilians running for cover. The invasions of three western towns and Gori, which sits on Georgia's only east-west highway, came despite a top Russian general's claim earlier Monday that Russia had no plans to enter Georgian territory.

Security Council head Alexander Lomaia said Monday it was not immediately clear if Russian forces would advance on Tbilisi, the Georgian capital. The U.N. Security Council called an emergency session at Georgia's request - the fifth meeting on the subject in as many days.

The two-front battlefield was a major escalation in the conflict that blew up late Thursday after a Georgian offensive to regain control of the separatist province of South Ossetia. Even as Saakashvili signed a cease-fire pledge Monday with EU mediators, Russia appeared determined to subdue the small U.S. ally that has been pressing for NATO membership.

Thirty-nine teenagers and children who were attending the camp have been returned to their homes, police said. The neo-Nazi group that ran the camp had described it as a youth adventure holiday. The police raid uncovered racist propaganda and Nazi material. The head of Germany's equivalent of the FBI told a newspaper NEO-NAZIS WERE ADOPTING INCREASINGLY VIOLENT TACTICS. In an interview with Der Tagesspiegel, Joerg Ziercke said neo-Nazis were "attacking left-wingers and police officers with an aggression that can be seen as a change in strategy".

"Before, neo-Nazis largely avoided violence for tactical reasons but this no longer appears to be the case," the Bundeskriminalamt chief was quoted as saying. "I see a new character, above all after the riots on 1 May in Hamburg," Mr Ziercke reportedly said.

Clashes erupted in Hamburg when 6,000 people took to the streets to protest against a march involving some 1,500 supporters of the far-right NPD party. Twenty police officers were hurt and some 60 people were arrested. Mr Ziercke also told Der Tagesspiegel that arson attacks by right-wing groups were on the rise, with some 15 incidents reported in the first five months of 2008 - five times as many as in the same period last year.

On Saturday night, thousands joined the grassroots movement Women for Israel's Tomorrow (Women in Green) in their annual march along Jerusalem's Old City walls. The group's leaders declared that all of Israel must remain in Jewish hands. Marchers read the biblical Book of Lamentations as is customary on the Ninth of Av, the 24-hr. fast which began the same night.

Also Saturday night, thirty families from the now-desolate Homesh recited the Book of Lamentations at the site of the former community. The group has set as its goal the rebuilding of the town of Homesh as a first step in rectifying the damage of Ariel Sharon's 2005 Disengagement Plan, in which Israel demolished 25 of its own towns with the stated purpose of improving its security situation.

An event organizer at Homesh told those gathered: "Jerusalem and Samaria were always connected: in the time of the Temples, during their destruction, and in 1967, when both areas were liberated. So too today, those who destroyed the Jewish towns of northern Samaria wish to divide Jerusalem, and those who strive to return to Homesh are struggling to strengthen the Holy City." The emotional service in Homesh, which mourned the destruction of Jerusalem in ancient times, was heightened by the destroyed surroundings, leaving many in tears.

On Sunday, several hundred Jews ascended the Temple Mount in several groups. Rabbi Chaim Richman of the Temple Institute led an early-morning group to tour the mount and noted the Moslem reaction to the presence of Jews there. He said, "When the Moslems see groups of Jews touring the mount, they realize that we haven't given up on it."

After two years of upward spiraling defaults, the problems with mortgages made to people with weak, or subprime, credit are showing the first, tentative signs of leveling off.

BUT WITH THE U.S. ECONOMY STRUGGLING, HOMEOWNERS WITH BETTER CREDIT ARE NOW FALLING BEHIND ON THEIR PAYMENTS IN GROWING NUMBERS. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-A, mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

DEFAULTS ARE LIKELY TO ACCELERATE because many homeowners' monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks are tightening their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are alt-A loans, many of which were made to people with good credit scores without proof of their income or assets. "SUBPRIME WAS THE TIP OF THE ICEBERG," said Thomas Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. "PRIME WILL BE FAR BIGGER IN ITS IMPACT."

Members of the Saudi ­Arabia-led oil exporters' cartel took home $645bn (£335bn, €430bn) between January and June, just below the record $671bn they earned last year, according to the US department of energy. At the current pace, Opec nations would earn about $1,245bn this year, a record. The recent 20 per cent drop in oil prices below $120 a barrel is unlikely to damp the earnings significantly, as higher output will offset the impact.

Industry estimates suggest that Opec production in July hit a record 32.6m b/d. The current oil price, at $116.53 a barrel, is still higher than the first half of the year's average: $111.1 a barrel. The flood of petrodollars has boosted Opec's overseas spending, with imports rising up to 40 per cent from last year's level.

Some government officials in the region have already started talking about slowing down government spending as a means of damping inflation, which has reached double-digit figures in many of the Gulf states and is causing increasing ­concern.

The closing of IndyMac in July, the third-biggest U.S. bank failure, may cost the fund up to $8 billion, in addition to an estimated $1.16 billion for seven closures through August 1. Premiums for deposit insurance will likely rise, FDIC Chairman Sheila Bair said in a July 30 interview. A decision on the increase is due by the fourth quarter. "It's going to be an expensive mess for the banking industry," said Bert Ely, president of Ely & Co Inc, a bank consulting firm based in Alexandria, Virginia. "Healthy banks are paying for the mistakes made by failed banks."

THE PACE OF BANK CLOSINGS IS ACCELERATING as financial firms have reported almost $495 billion in writedowns and credit losses since 2007. The FDIC's "problem" bank list grew by 18 percent in the first quarter from the fourth, to 90 banks with combined assets of $26.3 billion. A revised list is due this month. The insurance fund had $52.8 billion as of March 31.

Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine, said he expects 300 US banks to fail in the next few years, mainly because of mounting losses from real estate-related loans.

There has been controversy in the region over a deal to expand a Muslim autonomous zone there. The tensions in North Cotabato province came a week after a formal deal on the expansion was blocked by the courts. The military said the violence would not halt voting in elections in the nearby autonomous region of Mindanao.

Voters there are choosing a new governor, vice governor and members of a regional legislative assembly. North Cotabato is not part of the vote, because it is not included in the five-province Autonomous Region of Muslim Mindanao, which was created in a 1996 peace accord between the government and Muslim rebels.

The rebels are said to be frustrated at the fresh obstacles towards agreeing to expand the Autonomous Region of Muslim Mindanao (ARMM). Regional tensions have grown since the plan was agreed, with Christians fearful of the greater powers that would be granted to rebels.

Hardly an hour has gone by in the last few days without some world leader or organization weighing in on the ongoing conflict in the Caucasus. US President George W. Bush said that Russia's use of force against Georgia was "disproportionate." US Vice President Dick Cheney warned Russia that further violence would severely harm Moscow's relationship with Washington.

NATO has likewise blasted Russia and the European Commission has asked for an immediate cessation of hostilities. German Chancellor Angela Merkel has called for a cease-fire and French Foreign Minister Bernard Kouchner is in the region to broker one. So far, though, the results have been difficult to see.

"EUROPE NEEDS GEORGIA AND UKRAINE IF IT WANTS TO REMAIN INDEPENDENT OF RUSSIA'S EVER MORE MONOPOLISTIC OIL AND GAS DELIVERIES. While the West blocks Iran and Armenia is pledged to Russia, there are no pipeline routes for the rich resources of the Caspian Sea other than via Georgia - or via Russia. OIL ONCE AGAIN PLAYS AN IMPORTANT ROLE IN THIS WAR."

New figures on German industrial and export orders released this week suggest the engine of THE EU ECONOMY HAS STARTED TO SPUTTER. Fears of recession also rose after government officials warned this week about bad news from an upcoming second-quarter report, saying the German economy may have shrunk by around one percent.

THE OVERALL PICTURE SHOWS A EUROPE IN THE DOLDRUMS. German factory orders were down by 2.9 percent in June from May, and orders from abroad for German goods plunged by 5.1 percent. Production at German factories rose by 0.2 percent in June - less than expected - encouraging talk of a Europe-wide recession. Germany accounts for about a third of euro-zone output.

"Demand from abroad is slowing more sharply than domestic demand, which is also on a downward trajectory," said the German Economics Ministry, in a statement. "As a result prospects for industrial production all in all have worsened." Technically there won't be any recession until Germany sees contraction in two consecutive quarters - the second and the third of this year. But a recession hasn't been seen in the eurozone at all since the euro made its debut in 1999.

The cancellations began Sunday evening and affected flights between Alaska and Denver, Los Angeles, San Francisco, Portland, Seattle and Vancouver, British Colombia, the airline said in a statement. The ash was created by the eruption of Kasatochi volcano in the Aleutian Islands on Thursday.

The airline also issued a travel advisory on its Web site that said volcanic ash cloud could affect Anchorage, Fairbanks and southeastern Alaska destinations. Alaska Airlines cancelled the flights after the National Weather Service issued a warning Sunday for an area in Southeast Alaska near the panhandle, spokeswoman Caroline Boren told the Anchorage Daily News.

The great leap is revealed in forecasts for the Financial Times by Global Insight, a US economics consultancy. According to the estimates, next year China will account for 17 per cent of manufacturing value-added output of $11,783bn and the US will make 16 per cent. Last year the US was still easily in the top slot and accounted for a fifth of the total. China was second with 13.2 per cent.

John Engler, president of the National Association of Manufacturers, a Washington-based trade group, played down the effect of the projections. It was "inevitable" that China would take over on account of its size, he said. "This should be a wholesome development for the US, for it promises both political stability for the world's largest country and continuing opportunities for the US to export to, and invest in, the world's fastest-growing economy."

THE EXPECTED CHANGE WILL END MORE THAN A 100 YEARS OF US DOMINANCE. It returns China to a position it occupied, according to economic historians, for some 1,800 years up to about 1840, when Britain became the world's biggest manufacturer after its Industrial Revolution.