Israel on Sunday took the first steps to setting up a sovereign wealth fund similar to Norway's to safeguard billions of dollars in windfall natural gas revenue for national projects and emergencies.

The recent discovery of some of the world's largest off-shore gas fields has given Israel decades of energy independence and paved the way for it to become a natural gas exporter.

But it wants to avoid so-called Dutch disease whereby a sudden explosion in national wealth overheats the currency and undermines export industries.

This is to make sure the natural resources are efficiently and wisely exploited, without hurting jobs and the competitiveness of the economy, in a long-term, strategic view, Prime Minister Benjamin Netanyahu's office said after the cabinet drew up a draft plan for the fund.

The cabinet said much of the state's tax take from the gas bonanza would be invested abroad and income from the fund will be used for strategic national projects, including education and security.

The Tamar and Leviathan gas fields were found in 2009 and 2010 with combined estimated reserves of 26 trillion cubic feet (tcf) and sparked an exploration frenzy off Israel's coast.

Further fields could be found and government officials have said total revenues could reach $130 billion (£82.1 billion) by 2040.

GAS TAX

After months of fiery public debate, Israel last year imposed a progressive tax of as much as 50 percent on natural gas profits in addition to a royalties of 12.5 percent.

Major profits are expected to start rolling in only after Leviathan, the world's largest off-shore find of the past decade, begins production in around 2017.

About half of the state's revenues will be invested in the fund and then abroad as a security cushion to deal with large-scale events like wars, natural disasters and economic crises, the prime minister's office's statement said.

The fund will be managed by the Bank of Israel and supervised by the finance Ministry. Each year the prime minister will approve the transfer of income from the fund into educational and security projects.

Bank of Israel Governor Stanley Fischer has pushed the government to create the fund, warning that Israel's economy, which has so far weathered the global crisis, could be hurt by Dutch disease, named after the experience of the Netherlands after its discovery of gas in the North Sea in the 1960s.

As the Dutch currency strengthened it made non-oil exports less competitive. Manufacturing sectors declined and the economy soured.

Israel's fund will be similar that of Norway, which has one of the world's largest wealth funds to safeguard its natural gas revenue, officials said.

A draft of the law will be submitted to a government committee in the coming weeks, the statement said.

(Editing by David Cowell)