TEL AVIV, Jan 8 (Reuters) - Israel's Finance Ministry said on Thursday it had stuck to its decision to halt purchases of new software from Microsoft Corp (NasdaqNM:MSFT - News) this year, despite a lobbying effort by the U.S.-based software giant to retain such business.

Seeking to cut costs, the Finance Ministry recently said it would not purchase new software from Microsoft this year.

It also said it would encourage the development of lower-priced alternatives. To that end, it is cooperating with Sun Microsystems (NasdaqNM:SUNW - News) and IBM (NYSE:IBM - News) to design a Hebrew language version of OpenOffice software, a freely distributed open-source alternative to Office.

The dispute comes as some governments have examined alternatives to Microsoft's operating system, such as the freely available Linux system, to cut costs and reduce their dependence on the software giant.

Israel's Finance Ministry said Microsoft was unwilling to sell it individual programmes from its Office package, even though not all government departments need the entire suite of programmes. Microsoft's Israeli subsidiary has clarified to Israel's Finance Ministry that it was prepared to sell it individual components of its Office software.

In a letter to the ministry, a copy of which was obtained by Reuters on Thursday, Microsoft Israel Chief Executive Arie Scope said the company's position had always been to give the government various options.

"From reports in the media concerning the inability to buy individual components, it appears we have not clarified this sufficiently and we would like to make clear that every ministry can choose from one of the following options," the letter said.

The options included the buying of individual components.

A spokeswoman for Microsoft said this had always been the company's position and that the letter did not state anything new.

A spokeswoman for the Finance Ministry said its position had not changed following the letter.

The government accounts for 3-4 percent of Microsoft Israel's revenues, which totalled $120 million in the year ended June 2003.

The Finance Ministry also complained about the price, saying Office software cost $400 in the United States compared with 2,000 shekels ($455) in Israel.

"The government of Israel pays tens of millions of shekels every year to Microsoft," the ministry said in a statement. "Finding alternatives, some in the short term and some in the long term, will lead to financial savings for the government and a reduction in costs for every business and citizen in Israel."

Microsoft, it said, "has recently broken its policy of unified pricing of products worldwide. In Thailand and England there were reductions of hundreds of percent" on products that it sells.

Microsoft said in a statement it "takes a long-view approach to the way it works with governments, and is willing to work with the Israeli government and continue its long lasting relationship with it".

($1 = 4.39 shekels)