Bank of Israel Governor Prof. Stanley Fischer warned Monday that the deterioration in Israeli-Turkish relations could be harmful to Israel in the future.

"Turkey is an important trading partner for Israel, and the consequences of damage to trade with it will be severe for us," Fischer told the regional cooperation conference, chaired by Regional Development Minister Silvan Shalom, in Tel Aviv today.

Last week, Turkey expelled the Israeli envoy in Ankara, and suspended military agreements between the two countries following the publication of a UN-backed report on the incident over a year ago when IDF soldiers raided a Turkish Gaza-bound ship and killed nine activists.

Fischer noted that while Israel's economy was currently larger than most of its neighbors, Turkey, with a GDP of over $700 billion, was the strongest economy in the region, and was close to becoming an international economic power.

"Turkey is rebuilding its standing as an important player in regional trade, with Asian countries, with Europe, and with the Middle East," he said, adding "Turkey is growing fast. It is beginning to be the most productive country in Europe.'

Fischer also commented on the Palestinian economy only weeks before the Palestinian Authority heads to the United Nations seeking international state recognition, saying "The Palestinian economy is very far from where it could be were there full peace between Israel and the Palestinians. They have a sophisticated economy and sophisticated leadership, and there is no reason for their economy not to grow by 15% a year."

In a clear message to Prime Minister Binyamin Netanyahu, Fischer said that the vision of "economic peace" could never replace diplomatic peace. "I don’t believe that economic relations replace political relations. It's not true, and I heard such arguments in Africa. We must not delude ourselves. Political relations that will also have an economic basis will be more stable."