Israel's energy sector will be hurt in the short term by Egypt's decision to stop selling it natural gas, but the country has been weaning itself off the once-crucial supplies and has a number of contingency plans that will lessen the impact.

Sunday's announcement that Egyptian state-owned oil and gas companies would stop the gas sales, which were part of a 20-year deal, was the dramatic conclusion to a year of sabotage and pipeline attacks that had already disrupted supplies.

"It's an unfortunate announcement, but in no way is it a surprise. It sums up a reality that has existed for more than a year," Israeli Energy Minister Uzi Landau told Reuters.

"Nearly two years now we have been preparing for a halt in supplies. So, while it causes great discomfort and will bring a rise in energy prices, Israel has been developing its energy market without depending on this gas," he said.

The gas deal, signed in 2005, was the most significant economic agreement to emerge from the historic Israeli-Egyptian peace treaty of 1979.

But ties have been strained since Egyptian President Hosni Mubarak, an advocate of the peace deal, was toppled by a popular revolt last year.

To avoid further tension, Israel's leaders have described Egypt's move to stop supplying gas as a business, rather than diplomatic, decision. Egyptian officials also said ending the contract was a trade issue.

Gas from Egypt once accounted for about 40 per cent of Israel's reserves of natural gas, the country's primary energy source. But with pipeline attacks in Egypt's Sinai peninsula stopping flows for most of 2012, Israel has looked elsewhere.

Its own newly discovered reserves from huge offshore gas fields will secure Israel's energy needs for decades, even making it an exporter, but the first field, Tamar, will only come on line around April 2013. The even larger Leviathan prospect is due to begin production around 2017.

STOP-GAP SOLUTIONS

In the meantime, the government is rushing construction of an off-shore liquefied natural gas terminal to receive imports, has told exploration firms to speed up drilling on smaller, more accessible fields, and is planning to import a fleet of portable generators to prevent blackouts this summer.

Israel's electric utility - without Egyptian gas and with the country's sole working gas field nearly depleted - has turned to more expensive and dirtier fuels like diesel and fuel oil, causing electricity prices to surge.

The mostly underwater pipeline at the centre of the matter was built and is operated by the Eastern Mediterranean Gas Co (EMG), whose shareholders include Egypt Natural Gas Co, Thai energy giant PTT, U.S. businessman Sam Zell, Israel's Merhav and Ampal-American Israel Corp.

In 2010, EMG provided 2.5 billion cubic meters (BCM) of gas to Israeli customers. But that number was expected to more than double throughout the 20-year deal.

Once the pipeline attacks began, Ampal, together with PTT and Zell, took legal action against the Egyptian government, seeking $8 billion in damages for not safeguarding their investment.

One official with knowledge of the affair told Reuters, on condition of anonymity, that Egypt's latest decision could be a manoeuvre to help it in the legal proceedings.

Ampal's stock closed down 19.2 percent in Tel Aviv to 0.775 shekels, a new 52-week low.

In the past year, with supplies from Egypt stopped for more than 200 days, Israeli power plants and major industrial players have signed multi-billion dollar contracts to buy gas from the offshore Tamar field.

So Sunday's announcement was a good one for the Tamar consortium, led by Texas-based Noble Energy and Israel's Delek Energy, said UBS analyst Roni Biron.

"Most companies are not looking at Egypt as a reliable source of gas due to the repeated attacks on the pipeline and the geopolitical landscape, so you can't base a work plan on such unpredictable gas flows," he said.