JERUSALEM Israel's two political rivals may forge a unity government after centrist Foreign Minister Tzipi Livni narrowly defeated rightist Benjamin Netanyahu but he seemed to have more allies, Israeli politicians said on Friday.
Such a power-share could help resolve an Israeli political stalemate after Tuesday's parliamentary election, but still slow the efforts of U.S. President Barack Obama to revive Israeli and Palestinian peace talks for a two-state solution.
Election results published on Thursday after a count of soldiers' and prisoners' ballots showed no change in the initial results, with Livni's Kadima party winning 28 seats, and 27 for former premier Netanyahu's Likud.
The remaining seats were distributed among 10 smaller parties including the left-wing Labor, headed by Defense Minister Ehud Barak. Once Israel's dominant party, Labor registered its worst result in history, winning just 13 seats.
With such a close outcome, both leaders were vying for President Shimon Peres to nominate them as prime minister, which he will do only after consulting with political party leaders next week. He has a week to designate someone from the moment final results are published in the official gazette on February 18.
On election night, Livni called on Netanyahu to join her in a national unity government led by herself, something she offered last year before opting instead to call for an early election. Netanyahu has said he wants to be prime minister.
A leading newspaper, the mass-circulation Maariv, said behind-the-scenes talks were under way on a grand coalition of Kadima and Likud, with Labor. Together these parties would command 68 seats in Israel's 120-member parliament, wrote Maariv's senior political correspondent Ben Caspit.
One possible outcome might be these three secular, mainstream parties agreeing to form an administration that would reform voting rules to curb small religious and fringe groups.
Livni's camp had no immediate comment. Yisrael Katz of Netanyahu's Likud denied the report, but told Israel Radio Likud was interested in Kadima joining a coalition led by Netanyahu.
"Factually the situation is very clear, only Netanyahu can put together a majority coalition," Katz said.
Outgoing Deputy Prime Minister Hain Ramon of Kadima, who is close to Livni, told Army Radio: "We won't join any extremist right-wing government." He said any coalition should be headed by Livni as her party had won the most seats.
A FAR-RIGHT PARTNER
Both Likud and Labor deputies agreed a coalition could include the far-right party of Avigdor Lieberman, a former aide to Netanyahu, who has kept his options scrupulously open.
Lieberman emerged as potential kingmaker after winning 15 seats with a call for Israeli Arabs to undergo loyalty tests.
Stas Mesezhnikov, a lawmaker from Lieberman's Yisrael Beitenu party, told Israel Radio "the safest recipe for a stable coalition" was a coalition with Kadima and Likud, but would not say who he thought should lead it.
Peres, who under the law has the job of naming a prime minister after an election, is supposed to choose a candidate with the best chances of forming a stable coalition.
Results showed parties to the right of Kadima have 65 seats compared to 55 for Kadima and the left -- if one includes in the left the 11 seats held by mainly Arab parties. These are unlikely to join a government but do offer support to prime ministers they see as promoting peace with the Palestinians.
If Peres were to choose Netanyahu on the grounds he can build a right-wing majority, it would be the first time in Israel's 60-year history that the winner of the most seats in a general election had been passed over.
Peres could also ask both parties to work out a power-share. In 1984 Israel's largest parties were urged to do the same after an election stalemate. Peres, then Labor party leader, shared the premiership with former Likud party leader Yitzhak Shamir, with Peres prime minister for two years, then Shamir for two.
Once Peres makes his choice, by February 25, the candidate he chooses has 42 days to attempt to form a government.
Livni led peace talks last year with Palestinian President Mahmoud Abbas, and says she would try to revive them. Netanyahu is cooler on the key trade-offs needed for an accord -- ceding occupied land and halting Jewish settlement in the West Bank.
(Editing by Alastair Macdonald)