Israeli police grilled Prime Minister Benjamin Netanyahu's wife for two hours on Wednesday on suspicion that she diverted public money for private housekeeping expenses, local media said.

The interrogation came as a new threat loomed over the premier in his own long-running battle with corruption suspicions, as his former chief of staff reportedly considered an offer to turn state's evidence.

Israeli public radio said Sara Netanyahu was interrogated at National Fraud Squad headquarters near Tel Aviv over allegations she used public money for personal housekeeping expenses at the couple's official and private residences.

As during previous rounds of questioning of both the premier and his wife, police issued no statement on Sara Netanyahu's questioning.

But it was her husband's tribulations that grabbed the front pages of all of Israel's major dailies -- including the pro-Netanyahu freesheet Israel Hayom on Wednesday.

They reported that justice officials were nearing a deal with his former chief of staff, Avi Harow, in which he would give evidence against his former boss in exchange for immunity from prosecution for his own acts.

Harow has been under investigation for more than two years on suspicion of bribery, breach of trust, conflict of interest and fraud, Israel's top-selling newspaper Yediot Aharonot reported.

Left-leaning daily Haaretz said Harow has been giving investigators information on two of the ongoing investigations into Netanyahu.

One is based on suspicions that the premier unlawfully received gifts from wealthy supporters, including Australian billionaire James Packer and Hollywood producer Arnon Milchan.

Also being probed is a suspicion that Netanyahu sought a secret deal with the publisher of Yediot Aharonot.

The proposed deal, which is not believed to have been finalised, would have seen Netanyahu receive positive coverage in return for him helping scale down the operations of Israel Hayom, Yediot's main competitor.

The investigations have stirred Israeli politics and led to speculation over whether Netanyahu will eventually be forced to step down.

Justice Minister Ayelet Shaked told news site Ynet on Wednesday that Netanyahu is not legally obliged to quit -- even if testimony is given against him.

"At the moment there is no charge against him and there is no recommendation to charge him," she said.

"The ones to take that decision are the attorney general and the state prosecutor," she added.

"For now, let the prime minister get on with his job."

Source: AFP