"An unsuccessful attempt was made to launch into orbit a remote sensing satellite," the Defense Ministry said in a terse announcement on Monday, just after the top secret launch from the seaside Palmachim air force base in southern Israel.
The Ofek-6 satellite fell into the sea near the port city of Ashdod. No injuries were reported.
However, other spy satellites are still in orbit, taking high-resolution pictures and relaying them to Israel.
Israel, a world leader in satellite technology, relies heavily on its space-based cameras to monitor activities in Arab countries. The Ofek-5 satellite, launched in 2002, overflies Iran, Iraq, and Syria.
Israel hoped the Ofek-6 would enhance its coverage of these countries, in particular Iran, experts said.
"Israel wanted to use this (satellite) to monitor the Iranian nuclear developments and also things like their surface-to-surface missiles," said military expert Shlomo Brom, a retired general.
Defense Minister Shaul Mofaz said a replacement for Ofek-6 would be launched. "It might be with a delay, but it will go up," he said, without giving a date. He said budget cuts would not affect its deployment.
"We have to be on the satellite map," he said. Monday's failure cost an estimated $50 million.
Israel believes Iran is moving forward with a nuclear weapons program and has intensified efforts to isolate Tehran diplomatically. Israel is also believed to possess nuclear weapons but does not confirm or deny it publicly.
On Monday, Israeli Foreign Minister Silvan Shalom again asked his visiting Russian counterpart, Sergey Lavrov, to help contain Iranian nuclear ambitions.
Lavrov replied that Russia's nuclear cooperation with Iran was under the regulations of the International Atomic Energy Agency and did not pose a threat.
The failed launch came during increasingly hostile rhetoric between Israel and Iran, sparked by a successful test firing of the joint Israel-U.S. Arrow missile defense system in July. A second test last month failed.
Iran responded with a test of a new version of its Shihab-3 ballistic missile, which has been upgraded in response to Israeli weapons development.
Iran warned that an Israeli strike against its nuclear facilities would trigger harsh punishment.
In 1981, Israeli warplanes bombed an Iraqi nuclear reactor as it approached completion.
Iran and Israel, which once had close ties, have been at odds since Iran's 1979 Islamic Revolution. Iran routinely calls for the destruction of the Jewish state, while Israel accuses the Tehran regime of backing anti-Israel terrorists.
The Ofek-6 failed to attain orbit Monday after boosters on the satellite apparently malfunctioned during the third phase of flight, said Isaac Ben-Israel, head of the security studies program at Tel Aviv University, who attended the launch. The two-stage Shavit rocket functioned properly and was not the cause of the failure, he said.
The Defense Ministry said it would investigate the failure together with Israel Aircraft Industries, which developed the satellite and its launcher, but provided no other details. IAI refused to comment.
No attempts were expected to recover the satellite from the seabed.
While Israel has three other spy satellites in orbit, they are not expected to last for more than four years, Ben-Israel said. Ofek-6 was also more advanced than its predecessors, he said, but refused to give details.
Israel is second only to the United States in spy satellite technology, Ben-Israel said, adding that Israel is currently developing the Ofek-7 and Techstar, a radar satellite. Both are expected to be ready by 2008. If so, Israel would not be without a spy satellite, as the current ones are expected to serve another three years.
Israel has also launched the Amos-1 satellite, which carries TV stations. Ofek means horizon in Hebrew.