Israeli Prime Minister Ariel Sharon is holding talks with extreme right-wing and religious parties in an effort to prop up his teetering government.

The government was left close to collapse after its main coalition partner, the Labor Party led by former Defence Minister Binyamin Ben-Eliezer, withdrew in a row over funding for Jewish settlements in the West Bank and the Gaza Strip.

I have no intention of initiating early elections

Ariel Sharon, Israeli prime minister

Following Mr Ben-Eliezer's resignation, Mr Sharon moved swiftly to appoint hawkish former chief-of-staff Shaul Mofaz as Israel's new defence minister on Thursday, an aide to Mr Sharon said.

As head of the army, Mr Mofaz took a hard line towards dealing with the Palestinian uprising and advocated expelling Yasser Arafat from the Palestinian territories.

He was succeeded as army chief in July by Lieutenant-General Moshe Ya'alon.

Mr Arafat said the appointment of Mr Mofaz did not bode well for the peace process.

"Mofaz on one side, Ya'alon on the other and Sharon over them, what do you imagine will happen in the region?" Mr Arafat told the Arabic satellite television station al-Jazeera.

Despite the loss of Labor, Mr Sharon said he would continue leading the country.

"I plan to make every effort to establish an alternative government," he told Israeli newspaper Yediot Ahronot.

"I have no intention of initiating early elections," he added.

Mr Sharon's narrow ad-hoc coalition faces its first crucial test in a no-confidence vote which the left-wing Meretz Party has tabled for Monday.

Extreme right

Israel radio reported that Mr Sharon has made contact with the ultra-nationalist National Union-Yisrael Beiteinu Party, which commands seven seats in the Knesset (parliament), enough to restore the prime minister's majority.

Its chairman, Avigdor Lieberman, however, has previously made clear his party would prefer to take part in elections rather than join Mr Sharon's government.

Mr Lieberman is an ally of Mr Sharon's rival for leadership of the Likud Party, Binyamin Netanyahu, who quit Mr Sharon's coalition earlier this year.

The BBC's James Reynolds in Jerusalem says that, for now, it is not certain that the nationalist parties will accept Mr Sharon's invitation, which means he may have to press on for the moment with a minority administration.

Resignations

The crisis was triggered by the resignations on Wednesday of Mr Ben-Eliezer and Labor's five other ministers, including veteran dove and Israeli Foreign Minister Shimon Peres.

It came after talks failed to satisfy Labor's demands that Mr Sharon divert about $145m earmarked for Jewish settlements to jobs and social services instead.

Israel's foreign minister was among those who resigned

The resignations do not officially take effect until Friday.

Mr Ben-Eliezer said the government had abandoned the peace process with the Palestinians and had abandoned Israel's poor.

"We have reached a situation where we have done everything possible militarily and we have reached the moment where the government must present its political vision," he told parliament.

Likud members accused Mr Ben-Eliezer of sacrificing the government for his political career, as he faces a challenge from two more dovish candidates for the Labor leadership in a primary on 19 November.

The budget was put to parliament after the Labor ministers resigned and was passed on its first reading by 67 to 45 votes with the support of opposition parties.

US silent

Co-opting a number of small, nationalist parties would change the complexion of Mr Sharon's government, moving it further to the right at the risk of angering the United States.

The Israeli political class is distancing itself more and more from the quest for peace

Saeb Erekat, Palestinian negotiator

Washington has declined to comment on the crisis, but the Bush administration has made it clear it wants a period of calm in order not to divert attention from possible action against Iraq.

Palestinian officials voiced anxiety about a narrower coalition emerging in the Israeli Government.

"It appears the Israeli political class is distancing itself more and more from the quest for peace," said chief Palestinian negotiator Saeb Erekat.

If his new government proves untenable, Mr Sharon may have no choice but to call elections within 90 days.

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