JERUSALEM (Reuters) - Israeli Prime Minister Benjamin Netanyahu clinched deals on Thursday for a coalition government set to curb benefits for ultra-Orthodox Jews, a hot-button issue that has pushed peacemaking with Palestinians to the sidelines.
In control of 68 of parliament's 120 seats, the new administration - the first in a decade without ultra-Orthodox parties - is expected to take office next week, just days before a visit by U.S. President Barack Obama.
"There is a government," said Noga Katz, a spokeswoman for Netanyahu's right-wing Likud party, citing agreements with the centrist Yesh Atid and far-right Jewish Home parties as well as a smaller faction headed by former foreign minister Tzipi Livni.
Yesh Atid, led by ex-TV news anchor Yair Lapid, and high-tech millionaire Naftali Bennett's pro-settler Jewish Home rode a wave of anger in a January 22 election over state handouts and military draft exemptions long granted to the ultra-Orthodox minority.
After surprisingly strong showings at the ballot box, the two political upstarts effectively blackballed Netanyahu's largely loyal religious allies, a dramatic change that left the prime minister weakened as he enters his third term in office.
Although Lapid has advocated a resumption of peace talks with the Palestinians stalled since 2010, his party's second-place finish was a reflection of a renewed public focus on bread-and-butter issues such as the high cost of living.
Public expectations are high that the new government could affect real change in what many Israelis see as state coddling of the ultra-Orthodox that gives them little incentive or opportunity to learn skills and contribute to the economy.
Netanyahu will turn his attention again to the Palestinian issue and Iran's nuclear drive in his talks with Obama, with whom he has had a testy relationship. But U.S. officials have said Obama is not coming with any peace plan and expectations of any swift movement on the Israeli-Palestinian track are low.
"We have kept the government in our hands," Netanyahu told party members, noting that his Likud-Beitenu list would retain control of the defense and foreign portfolios in the incoming cabinet.
But he seemed to voice disappointment that domestic issues had diverted attention in Israel from what he sees as his new government's biggest challenge - preventing arch-enemy Iran from developing nuclear weapons.
"There is a disconnect in our public discourse between the challenges and the threats that are mounting against Israel and the public attention that they are getting, but there is no disconnect among us," he told his party's legislators.
Lapid, 49, and Bennett, 40, each said they expected to sign coalition deals with Netanyahu later in the day. Livni made her pact with the prime minister several weeks ago.
The agreements on Thursday were sealed before a March 16 deadline for Netanyahu to announce a new government. Yesh Atid said Lapid would become finance minister. Israeli media reported Bennett would get the trade and industry post in the cabinet.
"We hope that this Israeli government will choose peace and negotiations and not settlements and dictation," Palestinian chief negotiator Saeb Erekat said.
But Amotz Asa-El, a political analyst at Jerusalem's Shalom Hartman Institute, predicted that domestic affairs would initially dominate the new coalition's agenda, with turmoil in the Arab world dimming chances for peace moves.
"Events in neighboring countries and in the belt of countries beyond the neighboring countries are so unpredictable ... (and) so unstable that Israel, regardless of who leads it at the moment, has no choice but to passively watch at the sidelines as things unfold," Asa-El said.
Bennett rejects any future Palestinian state and has strong support among Israeli settlers in the occupied West Bank.
But he has pledged not to be an obstacle to peace talks, saying that in any case, he does not believe they will achieve anything. Neither Bennett nor Lapid have spoken out in detail on how they would deal with the Iranian issue.
Palestinians have demanded Israel suspend construction in settlements in the West Bank and East Jerusalem, areas captured in the 1967 Middle East war and which they seek, along with the Gaza Strip, for a future state.
Netanyahu has called on the Palestinians to return to the talks without preconditions. Most countries regard Israel's settlements as illegal.
Additional reporting by Dan Williams; editing by Mark Heinrich