Israel faces gridlock, peace prospects dim

By Douglas Hamilton

JERUSALEM (Reuters) - Israel headed for political gridlock on Wednesday with both sides declaring victory in an election that left the prospect of Israel and the Palestinians making peace as distant as ever.

Foreign Minister Tzipi Livni's centrist Kadima party won the most votes but had little chance of building enough support for a resilient coalition government. Right-wing opposition leader Benjamin Netanyahu can get the backing in parliament, but analysts said the likely alliance would prove dysfunctional.

"I won," read the headline of the country's biggest newspaper, Yedioth Ahronoth, over photographs of both leaders.

But to some commentators, the rival claims showed that Israel, deeply beset with divisions over constitutional issues and years of failed diplomacy with Arabs, had lost.

"One thing is clear to all Israeli voters," said the paper's Eitan Haber. "The political system is shattered."

Washington signaled equanimity. The new administration of U.S. President Barack Obama wants to revive peace talks to give the Palestinians a state alongside Israel, provided they can repair a schism triggered by Islamist Hamas's hold on Gaza.

"We certainly hope that a new (Israeli) government will continue to pursue a path to peace. I see no reason to think a new government would do something otherwise," State Department spokesman Robert Wood said.

Israeli President Shimon Peres must now decide whether to call on Livni or Netanyahu, who then has 42 days to form a government. An official election tally is due out by February 18, after which Peres would have a week to make his nomination.

As the parties began negotiating possible pacts, Israeli media said it seemed Peres would have no choice but to tap Netanyahu if the majority rightists all back him.

But it would be the first time in Israel's 60-year history that the winner of an election would be passed over.

The results, not yet official, gave Netanyahu 27 seats in the 120-seat Knesset, while Livni's Kadima won 28.

She said she would be prime minister and invited Netanyahu to join a "unity government." But Netanyahu said he would lead the "nationalist camp" in parliament, and control 64 seats.

"With God's help I will lead the next government,"

Netanyahu, 59, told supporters of his Likud party.

"Tzipi Livni has only the slightest chance, or none at all, of forming a government under her leadership," said Abraham Diskin, a political scientist at Jerusalem's Hebrew University.