TEL AVIV (Reuters) - Israel's cabinet on Sunday is expected to approve a new law banning the sale of binary options overseas by online trading firms based in Israel, a business that has drawn broad international criticism over allegations of illicit practices.

The proposed amendment to the country's securities law was drawn up by the securities authority and other government offices and will be submitted to the cabinet by Finance Minister Moshe Kahlon.

After the cabinet it will head to parliament, where it is expected to be fast-tracked, giving it priority over other bills, a spokeswoman for the Israel Securities Authority said.

The draft law also prohibits any type of trading forum that sells to overseas clients - even if they do not offer binary options - without receiving a license from the country where clients reside. [L8N1G85PR]

Breaking the law will be punishable by up to two years in prison and if money laundering is involved, punishment could reach 10 years in prison.

Binary options involve placing a bet on whether the value of a financial asset - a currency, commodity or stock - will rise or fall in a fixed timeframe, sometimes as short as a minute.

Last year the ISA became the world's first regulator to prohibit the risky transactions from being offered domestically and its chairman, Shmuel Hauser, then sought an amendment to give him power to target groups marketing them abroad as well.

(Reporting by Tova Cohen, Editing by Ari Rabinovitch)