By Maytaal Angel

JERUSALEM (Reuters) - Israel's finance ministry said on Friday it would divert to the war effort some 1.6 billion shekels ($440 million) this year out of billions earmarked for parties in Prime Minister Benjamin Netanyahu's far-right coalition government.

Leading Israeli economists and central bankers estimate the war with Hamas will cost the government tens of billions of shekels, and have called on Netanyahu to cancel billions of dollars of non-essential spending.

They expressed alarm last month at the government's plan to transfer 9 billion shekels ($2.2 billion) to ultra-Orthodox and far-right-wing pro-settler parties, as part of an agreement Netanyahu made with them to secure his ruling coalition.

The finance ministry's proposal would cut around 70% of 2.5 billion shekels of funding for coalition partners still due to be paid in the current 2023 budget.

The funds are highly contentious as much of the money is aimed at encouraging ultra-Orthodox men, who are exempt from mandatory army service, to remain outside the workforce.

Finance Minister Bezalel Smotrich said in a letter on Friday that he planned to cut some 4 billion shekels ($1 billion) from the 2023 budget excluding war funding, and increase war funding by a further 9 billion, on top of 22 billion shekels already allocated.

($1 = 3.8591 shekels)

(Reporting by Maytaal Angel; Editing by Peter Graff)