* Israel budget deficit seen near 4 percent of GDP in 2010
* Unemployment rate seen under 6 percent by end 2011
* Intervention to weaken shekel a defensive measure
* Finance Minister already sees evidence of "currency war" (Updates with added comment, background)
By Daniel Bases
NEW YORK, Oct 5 (Reuters) - Israeli Finance Minister Yuval Steinitz said on Tuesday the government's 2010 budget deficit will be near 4 percent of gross domestic product, well below the 5.5 percent target as the economy rebounds from the financial crisis.
"Until now we are meeting the target and doing even better. We finished 2009 with 5 percent rather than 6 percent, and in 2010, because we did succeed to initiate rapid or speedy recovery, it will be more like 4 percent instead of the ceiling like 5.5 percent," Steinitz told Reuters in an interview.
Steinitz, in New York to speak with investors before heading to Washington for meetings of the International Monetary Fund and World Bank, said he would not predict the deficit for 2011 or 2012.
"We will meet the ceiling," he said referring to the 3 percent budget deficit forecast for 2011 and 2 percent in 2012.
Growth was an annualized 4.6 percent in the second quarter, while the jobless rate slipped to 6.2 percent. For all of 2010 the economy is expected to grow 4.1 percent.
Steinitz said the unemployment rate can continue to drop and has the potential to break through an historical floor.
"We do believe that maybe for the first time in Israeli history we will be able to reduce unemployment toward the end of 2011 beyond 6 percent, 5-point-something percent," Steinitz said.
CURRENCY TUSSLE
Steinitz tried to deflect attention away from friction between the Finance Ministry and Bank of Israel Governor Stanley Fischer over the latter's action to weaken the shekel.
The shekel
The bank has been buying dollars in recent weeks to prevent a rapid appreciation of the Israeli currency, since a strong shekel tends to hurt exports -- which account for more than 40 percent of Israel's economy.
Israel has been raising interest rates while much of the developed world economies has been lowering them to try to ignite growth and stave off deflation.
Israel's key short-term lending rate
Asked if there is a policy dispute with Fischer, Steinitz said no.
"Look, so far we completely agree on most issues. Generally speaking I think that we did have no choice, the Bank of Israel did have not have a choice. We couldn't allow the shekel to become the strongest currency in the world because this would harm our exporting industries," he said.
"It was defensive, it was reactive to other developments in the world, in China and the rest of the world vis-a-vis China. Almost all governments were trying to weaken their currencies, also in Europe, Britain, Switzerland," Steinitz said.
A big topic for discussion at the upcoming IMF/World Bank meetings will likely be currencies, and beggar-thy-neighbor policies as countries seek a firmer economic footing.
"There is already evidence we are in a currency war," Steinitz said. (Editing by James Dalgleish)