Livni faces coalition demands after slim win

Tzipi Livni, the newly elected leader of Israel's ruling Kadima party, last night began the daunting task of trying to assemble a workable coalition government as her narrowly defeated rival unexpectedly announced he was taking a "break" from politics.

The potentially pivotal ultra-orthodox party Shas immediately laid down tough financial and political terms for remaining in a government led by Ms Livni. She defeated the former military chief of staff Shaul Mofaz for the party leadership by just 431 votes.

While making it clear to Ms Livni he accepted the result of Wednesday's contest, Mr Mofaz confounded claims that he would seek a senior post in her government by saying that he did not want a ministerial or parliamentary post. He would instead find "additional ways to contribute to the state of Israel and my family."

Mr Mofaz told supporters last night that he had rejected legal advice in favour of challenging the result, which was announced after TV exit polls had wildly exaggerated the scale of Ms Livni's lead.

"I decided that the good of the state exceeds any personal desire, particularly when the boat moves over stormy waters," the former Transport minister added.

As so often with past Israeli leaders, Shas, which has 12 Knesset members, has projected itself to be the most immediate obstacle to Ms Livni's attempts over the next seven weeks to form a government on her terms. She said during her leadership campaign that she was not prepared to pay "any price" to form the coalition needed to stave off the prospect of a general election next January.

But Eli Yishai, the Shas leader, made it clear in initial talks with Ms Livni that the party was seeking enhanced child allowances for the large religious families that form its membership base.

More ominously for the talks, Ms Livni is widely expected to continue with the moderate West Bank-based Palestinian leadership under President Mahmoud Abbas. Mr Yishai also declared that, "our condition for remaining in the coalition is a promise that Israel will not relinquish Jerusalem".

Shas's positioning came as Saeb Erekat, one of Mr Abbas's most senior negotiators, welcomed the selection of Ms Livni as, "the Israeli people's choice".

"Livni was deeply involved in the peace process so we think she will continue peace-seeking with us," he said. In Gaza, Hamas said Ms Livni's election "means the continuation of Israel's aggressive policies against the Palestinian people".

Benjamin Netanyahu, whose right-wing Likud party has long been riding high in the Israeli polls, said: "The cleanest and most democratic thing to do is to hold a general election."

Elections will be the only option if Ms Livni fails to form a coalition within six weeks of being asked by President Shimon Peres. Some Labour figures also reportedly suggested that the party – the second largest member of the current coalition – was not "afraid of elections" and that the Prime Minister should not be chosen by Kadima members alone. But there were also indications from other figures that this could be a case of striking a position ahead of coalition negotiations with Ms Livni.