NEWSMAKER-Netanyahu handed reins of a jittery Israel

JERUSALEM, Feb 20 (Reuters) - Bibi's back.

A decade after being ousted by Israelis entranced by his then rival's pledges of peace accords and modest governance, Benjamin Netanyahu has won a new lease on power over a country now more given to disaffection and fears of war.

President Shimon Peres on Friday handed him a mandate to form Israel's next government, and the right-wing Likud leader now has 42 days to put together a coalition. He should manage that with like-minded allies, even if his appeal to centrist and left-wing rivals for a unity government falls on deaf ears.

Hamas in Gaza, Hezbollah in Lebanon, Iran's nuclear designs and Israel's economic ills provided all the grist Netanyahu needed to end ideological drift in his hawkish Likud party and more than double its seats in an election 10 days ago.

With 27 seats, he was still one short of the centrist Kadima party of Tzipi Livni. But the rightward drift of the electorate gave him a better chance of forming a majority coalition.

The U.S.-educated son of an noted Zionist historian, Netanyahu, 59, cast his comeback as vindication of the Likud's long view -- that ceding occupied Arab land unilaterally had backfired by encouraging Islamist foes of the Jewish state.

A former finance minister who had championed welfare cuts and free-market practices, he also presented himself as the man to keep Israel afloat above swelling global budget crises.

Yet stability has often eluded the career of the telegenic Netanyahu, who is known by his boyhood nickname "Bibi".

He became the youngest Israeli prime minister in 1996, defeating the centre-left Labour leader Peres, whose prized interim Palestinian peace deals had been all-but blown away by a wave of Hamas suicide bombings.

Netanyahu's campaign pledge was "peace and security" but he faced a withering test over the opening by archaeologists of a new entrance to a tunnel in Arab East Jerusalem, triggering gun battles in which 60 Palestinians and 15 Israelis died.

Despite publicly reviling Palestinian leader Yasser Arafat, Netanyahu eventually handed him most of the divided city of Hebron in 1997, departing from the Likud's refusal to give up biblical West Bank territory. But when Netanyahu broke ground for the Jewish West Bank settlement of Har Homa near Jerusalem, he plunged U.S.-sponsored peacemaking into 19 months of crisis. That culminated in Netanyahu being toppled by Labour's Ehud Barak.

Though Barak's bids for rapprochement with Syria and the Palestinians failed, they were welcomed by a U.S. administration that saw a tiring truculence in Netanyahu.

Diplomat Dennis Ross described him as "overcome with hubris" and quoted then President Bill Clinton as complaining that Netanyahu acted as though Israel were the real superpower.

What might this bode for Netanyahu's ties with the new Democratic president, Barack Obama, and Clinton's wife Hillary, who as secretary of state must deal with a region bracing for a threatened Israeli attack on Iranian nuclear facilities and the possibility of Palestinian statehood negotiations being shelved?

"GREATER WISDOM" Confidants insist there is no cause for concern. They say post-9/11 Washington, as well as some parts of Europe, appreciate the conservative strategies advanced by Netanyahu.

He has been cool to recently revived Israeli peace overtures with Syria, though during his term as premier he sent an envoy to sound out Damascus' demand for a return of the Golan Heights.

"We've all come a long way, and everyone now realises the extent to which Bibi's predictions proved true," said Yuval Steinitz, a senior Likud lawmaker.

Netanyahu's younger brother Iddo told Israeli television the politician now has "greater capabilities and greater wisdom".

The Likud chief will have to form a coalition government that may draw on Labour and Kadima, though he also spoke favourably of including the ultranationalist Yisrael Beiteinu, which made substantial gains in the parliamentary ballot.

A former military commando, Netanyahu is a self-styled terrorism expert, writing books and forming a think-tank after his older brother Yoni was killed leading the raid to release Israeli hostages held at Entebbe airport in Uganda in 1976.

His fluency in English and mastery of the soundbite won him praise at home and abroad in the late 1980s and early 1990s when he served as U.N. ambassador and as deputy foreign minister.

In a 1993 scandal known as "Bibigate", Netanyahu went public with an extra-marital affair, saying he had been the victim of a blackmail attempt. But he patched it up, both with his third wife Sara -- with whom he has two teenage sons -- and voters. Yet Netanyahu found himself the perennial focus of hostile press at home, with commentators seeing a crass populism in his claim to be battling national elites. Some pundits suggested that Israel's dominant Ashkenazim -- Jews of European descent -- resented "one of their own" for drawing so much support from a Sephardi underclass with Middle Eastern and North African roots.

Netanyahu's last cabinet portfolio was as finance minister in Ariel Sharon's Likud-led government, a post in which he won praise from business leaders for free-market reforms. He quit in protest shortly before the Israeli pullout from Gaza in 2005, which prompted a schism in which Sharon bolted to form Kadima.

Critics accused Netanyahu of a flip-flopping opportunism, noting that he had earlier supported the Gaza withdrawal in a parliamentary vote. Sharon, a flinty former general, dismissed Netanyahu as "unable to handle pressure".