updated 3/16/2009 3:47:39 PM ET 2009-03-16T19:47:39

Prime Minister-designate Benjamin Netanyahu's Likud Party has initialed a coalition agreement with an ultra-nationalist faction that brings its leader significantly closer to becoming foreign minister, a Likud party spokeswoman said Monday.

Avigdor Lieberman, who heads the right-wing Yisrael Beitenu party, has drawn accusations of racism for a plan that would require Arab citizens to sign loyalty oaths or lose their citizenship.

Although that plan is not likely to be implemented, his designation as foreign minister could harm Israel's international ties.

EU urges two-state solution
The European Union urged Netanyahu to craft a government that embraces the long-standing goal of an independent Palestinian state living side by side with Israel — signaling that the appointment of Lieberman as foreign minister would be seen in Europe as a setback to Middle East peace efforts.

"Let me say very clearly that the way the European Union will relate to an (Israeli) government that is not committed to a two-state solution will be very, very different," Javier Solana, the EU's foreign and security affairs chief, said Sunday.

Lieberman's appointment to the post is not yet finalized, however. Likud spokeswoman Dina Libster said the coalition agreement included a provision that both sides were prepared to accept more centrist partners, such as the Kadima Party of the current foreign minister, Tzipi Livni.

That wording left a door open for Livni to retain her current job if she were to join such an alliance.

Livni confirmed reports that Netanyahu had resumed overtures to recruit her in recent days, but said their talks had failed to sway her. Livni has said she would only serve in a government that is committed to a peace agreement.

"It's no secret that during the past week there were discussions with the chairman of the Likud, the designated person to form a government," she told Kadima lawmakers Monday. "Things have not changed."

Prepared to join as equal partner
She said that while she was prepared to join Netanyahu as an equal partner, she would not serve in order to lend legitimacy to an alliance with Lieberman and other hawks.

"That is the central thesis for any kind of unity government," she said. "Not joining to strengthen a government whose positions are not our positions."

Libster, the Netanyahu spokeswoman, held out the possibility that a deal could still be struck with Livni. "Both Likud and Yisrael Beitenu are interested in a broad government," she said.

The agreement with Yisrael Beitenu is the first Netanyahu has initialed on his way toward setting up a coalition. The government taking shape would include nationalist and Orthodox Jewish parties that take a harder line on Palestinian and Arab issues than the outgoing administration of Prime Minister Ehud Olmert.

Netanyahu has criticized last year's U.S.-sponsored peace talks between Israel and the Palestinians, aimed at partitioning the land and establishing a Palestinian state. The talks made little progress.

Netanyahu favors focusing on efforts to bolster the Palestinian economy, leaving issues like borders, sovereignty and Israeli settlements for a later stage.

In defiance of Israeli commitments to international plans, Netanyahu also favors expanding Israel's West Bank Jewish settlements.

Collision course with Palestinians?
That could put Israel on a collision course with the Palestinians and the new Obama administration. In a recent visit, U.S. Secretary of State Hillary Clinton said the goal of negotiations must be the creation of a Palestinian state living next to Israel in peace.

Though Lieberman now says he supports Palestinian statehood, he also believes such a state should include territory inside Israel containing heavily populated Arab areas. Such a plan could strip hundreds of thousands of Arabs of their Israeli citizenship, regardless of their feelings on the issue.

Speaking in Brussels, Belgium, before the Likud-Yisrael Beitenu accord was signed, Palestinian Foreign Minister Riad Malki said the emerging government was "anti-peace."

Netanyahu still needs to add several other parties to reach a majority in the 120-member parliament. In the election last month, his Likud won 27 seats, and Yisrael Beitenu adds another 15.

Kadima won 28 seats, but Netanyahu was chosen to form a government because a majority of members of parliament said they favored him over Livni as premier.

Netanyahu's negotiators were set to meet later Monday with a team from Shas, an ultra-Orthodox Jewish party with 11 seats in the parliament.

If Kadima stays outside, Netanyahu is expected to bring in Shas and other smaller hard-line parties to give him a majority of 65.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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