* Israeli leader sets up committee to address protesters' demands

* Summer of discontent strikes new note in Israeli politics

* Protesters demand lower prices

JERUSALEM - Prime Minister Benjamin Netanyahu scrambled on Sunday to try to quell escalating demonstrations for lower living costs after a quarter-million people marched in the biggest economy-related protests in Israel's history.

While Netanyahu's governing coalition faced no immediate threat, a summer of discontent in Israel has underscored the potential electoral impact of a burdened middle class rallying under a banner of "social justice" and rewriting a political agenda long dominated by security issues.

On the morning after Saturday's demonstrations in Tel Aviv, Israel's commercial capital, and other cities, Netanyahu -- a champion of free market reform -- announced at the weekly cabinet meeting the appointment of a committee of experts to propose social-economic reform.

"Over the past few weeks, we have witnessed a public protest that expresses real hardship," he said.

Holding out the prospect of "major change" -- while cautioning he would "not be able to satisfy everyone" -- Netanyahu said the committee, headed by Harvard-educated Israeli economist Manuel Trajtenberg, would hold "a broad dialogue with various sectors in the community".

In under a month, the popular protest movement has swollen from a cluster of student tent-squatters into a diffuse, countrywide mobilisation of Israel's middle class.

Itzik Shmuli, a protest leader, welcomed Netanyahu's round-table initiative. But, he told Israel Radio: "I want to be sure ... we will not be given the runaround for three months, at the end of which we will not emerge with real solutions."

GROWTH  

Israel projects growth of 4.8 percent this year at a time of economic stagnation in many Western countries, and has relatively low unemployment at 5.7 percent.

But business cartels and widening wage gaps have kept many citizens from feeling the benefit.

The conservative coalition government has vowed to free up more state-owned land for development, build more low-cost housing and improve public transport. It also wants to lower dairy prices with more imports and boost medical staff numbers to address demands by striking doctors.

Demands submitted by the National Union of Israeli Students go much further, calling for an expansion of free education and bigger government housing budgets.    

The demonstrations have upstaged Netanyahu's standoff with the Palestinians ahead of their bid to lobby for U.N. recognition of statehood next month.

Protests also deflated his celebration of Israel's stability as popular uprisings rock surrounding Arab states across the Middle East and North Africa.

Social media also played a role in the Israeli protests, which began with a call on Facebook for a boycott of cottage cheese after the price of the Israeli staple hit a new high.

On one main Tel Aviv thoroughfare a throng of demonstrators stretched as far as the eye could see against a backdrop of soaring skyscrapers.

"A new country," read one banner newspaper headline, amid commentary cautioning Netanyahu that he could not afford to ignore the shifting focus in Israeli society.

Protests on such a scale in the country of 7.7 million have usually been over issues of war and peace.

Several rightist commentators have voiced fear the demonstrations signal the resurgence of Israel's left-wing after its voice was muted by Israeli-Palestinian violence over the past decade and flagging peace prospects.

"There has been nothing like this for decades -- all these people coming together, taking to the streets, demanding change. It's a revolution," said Baruch Oren, a 33-year-old protest leader.

Communications Minister Moshe Kahlon, named by a Netanyahu spokesman as a likely member of the new committee, said a solution was required even if it "cost billions" at a time when Israel is watching the debt jitters of the United States and parts of Europe. Israel's debt burden is 75 percent of GDP, lower than that of most major Western economies.