Coalition talks flop pushes Israel toward election

By Douglas Hamilton and Ori Lewis

JERUSALEM (Reuters) - Israel stepped closer to an early election on Friday when a Jewish religious party refused to join a new coalition under Tzipi Livni, the designated successor to scandal-hit outgoing Prime Minister Ehud Olmert.

Unless reversed, the decision of the ultra-Orthodox Shas party, a linchpin of successive governments, could kill off already dwindling hopes of a peace deal with Palestinians this year by leaving Israel under caretaker leadership for months.

Shas said its word was final, and its refusal to consider dividing Jerusalem for the sake of a peace deal lay at the heart of it. But Shas was also seeking an increase in the budget for welfare, which Livni's centrist Kadima party rejected.

"Shas made its decision based on its principles. If our demands had been met, we would have been in. They were not met, and we cannot join," said Shas chairman Eli Yishai. "Shas cannot be bought and Shas will not sell out on Jerusalem."

A Livni ally cautioned there was still time for a coalition deal to be forged, and Livni had 48 hours to negotiate before the expiry of her self-imposed Sunday evening deadline.

"I don't think we've failed. It's not over until it's over," Yoel Hasson, a Kadima lawmaker, said. He added that efforts to establish a coalition would continue through Sunday and if they failed, "we will go for an election, and win it."

Gidon Saar of the right-wing opposition Likud, which is riding high in the polls and favours an election, accused Livni of "still trying to tempt all sorts of party fragments and to form some sort of clumsy government."

LIVNI SILENT