Families of Israeli Arabs shot dead on a bus in Galilee are not considered terrorism victims because their killer was Jewish, the defence ministry says.

Under Israeli law, only attacks by "enemies of Israel" are considered terrorism, the ministry said.

The ruling means families of the four victims will not be entitled to the lifelong monthly payments given to Israeli victims of Palestinian attacks.

The ministry says it has offered them an unspecified one-off payment.

The Arabs were killed by a 19-year-old Israeli army deserter who was thought to be trying to derail the evacuation of Jewish settlements in Gaza.

The architect of the Gaza plan, Prime Minister Ariel Sharon, called the shooting "a despicable act by a bloodthirsty terrorist".

He is reported to have asked for the Galilee dead to be treated as terrorism victims - but to have been prevented by the law.

An Israeli Arab member of parliament, Muhammad Barak, said there was a strong scent of racism about the decision, because it distinguished between Jewish terrorism and Arab terrorism.

He has submitted an amendment to allow Israel to compensate anyone hurt in "hostile activities by a terror organisation" - not just those hurt by "organisations hostile to Israel", Haaretz reports.