Israeli Prime Minister Ariel Sharon is apparently ready to appoint his predecessor Binyamin Netanyahu to the cabinet as he struggles to put together a governing coalition after the Labor Party's withdrawal.

Mr Netanyahu - a rival for the leadership of Mr Sharon's Likud party - has been meeting Mr Sharon at the prime minister's ranch in southern Israel, and could be offered the post of foreign minister, according to Israeli media reports.

Arafat says he fears a military escalation

The hawkish Mr Netanyahu has said he will challenge Mr Sharon in the upcoming Likud leadership election - a move that would stop him taking the foreign ministry post.

The prime minister is meanwhile looking to ultra-nationalist and religious parties to shore up his shaky government after the moderate Labor Party quit the coalition over a budget row.

Mr Sharon has already offered the post of defence minister to hard-line former army chief of staff Shaul Mofaz.

Diplomacy call

Outgoing Defence Minister and Labor leader, Binyamin Ben-Eliezer, has praised the Israeli army for what he said was its success against terrorism.

At a farewell meeting for some of his staff, Mr Ben-Eliezer said that for the sake of the soldiers it was time for a serious diplomatic move to end the tragic situation in the region.

General Mofaz has a reputation for adopting a harsh line towards the Palestinians and has advocated the expulsion of their leader Yasser Arafat.

Mofaz on one side, Ya'alon on the other and Sharon over them, what do you imagine will happen in the region?

Yasser Arafat

The move has sparked warnings from Mr Arafat, who said that the Mid-East conflict would get worse with a narrow right-wing coalition running Israel.

For the past two years General Mofaz has been in charge of combating the Palestinian uprising. His tactics have brought increasing criticism from left-wingers and human rights groups.

Under his command Israeli troops have stepped up targeted assassinations of suspected terrorists, demolitions of their homes and blockades of Palestinian towns and villages.

General Mofaz has accused the Palestinian leadership of "being infected from head to toe with terror".

According to Israeli media his appointment must be approved by the government and parliament, probably next week.

Moshe Ya'alon, previously General Mofaz's deputy, succeeded him in July as army chief of staff, and shares his hard-line stance towards the Palestinians.

Mr Arafat said the appointments 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.

Mr Arafat said he expected a military escalation against the Palestinians.

Majority lost

Following Labor's departure from the government coalition Mr Sharon has been left with the support of just 55 members of the 120-strong Knesset (parliament).

The political parties that Mr Sharon is courting oppose negotiations with the Palestinians and advocate Jewish settlement expansion in the West Bank.

But the BBC's Barbara Plett in Jerusalem says most observers do not expect radical policy changes.

Our correspondent says Mr Sharon is eager to protect his strategic relationship with the United States and Washington has drawn some pretty clear red lines.

A narrow right-wing government would probably continue the military policy against the Palestinians and bury even more deeply the chances of reviving a political process.

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.

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