updated 10/24/2008 9:50:49 AM ET 2008-10-24T13:50:49

An ultra-Orthodox party announced Friday it will not join a new coalition government being formed by prime minister-designate Tzipi Livni, making it more likely Israel will soon hold national elections.

In a statement, Shas Party spokesman Roi Lahmanovitch said Livni did not meet his party's demands for more funds for poor Israelis and for a commitment that parts of Jerusalem will not be ceded to the Palestinians.

The group of rabbis that controls the party, known as the Council of Torah Sages, decided that Shas "will not be able to join the government under these conditions," Lahmanovitch said.

Elections would throw Israel's political system into disarray and likely freeze the peace talks Israel is holding with the Palestinians and with Syria. Current polls show that the likely winner would be the hardline Likud Party, headed by Benjamin Netanyahu.

Livni replaced the outgoing prime minister, Ehud Olmert, as head of Israel's ruling party last month and is trying to cobble together a new government. Shas, with 12 seats in Israel's 120-seat legislature, would be a key acquisition and give her a majority in parliament alongside her other coalition partners.

For Livni, slim coalition or early elections?
If Shas sticks to its refusal, Livni will be left with two options: trying to form a slim coalition with the help of smaller ultra-Orthodox and dovish parties or calling early elections this spring.

Livni said Thursday that if she did not have a new coalition government by Sunday she would call elections.

In response to the Shas announcement, Livni spokesman Gil Messing said Friday only that her Thursday ultimatum "remained true today."

No compromise on Jerusalem
Shas has opposed any talks on the future of Jerusalem as part of Israel's negotiations with the Palestinians, who want the eastern part of the city as the capital of their future state.

"Israel's capital is not currency that can be traded," the Shas statement said Friday, and ceding parts of the city would make Israel look as if it is bowing to "political pressure." Livni has served as the chief negotiator with the Palestinians.

With two days to go before Livni's deadline, the possibility of a deal remained open. The Shas statement — like Livni's ultimatum — might be mainly a bargaining tactic.

"Nothing happened. I suggest everyone wait patiently," said lawmaker Otniel Schneller of Livni's Kadima Party.

Shas leader Eli Yishai hinted the party could still change its mind, telling Israel Radio that the party had not decided that new elections should be held. The decision was in Kadima's hands, he said, and "if they don't meet our demands, we won't be able to join."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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