Israeli Prime Minister Ariel Sharon has called early elections after failing to rebuild his crippled coalition government.

Mr Sharon described the move as the "least bad option," but said he had been forced to act because he could not agree to numerous conditions set by potential political allies.

Elections at this time are not what the country needs

Ariel Sharon

Former Prime Minister Binyamin Netanyahu - a rival to Mr Sharon for the Likud Party leadership - has meanwhile agreed to serve as foreign minister in Mr Sharon's government until the elections in late January.

Mr Netanyahu said he would still challenge Mr Sharon before the elections, but accepted the prime minister's offer because Israel was in a crisis.

"We know that we are in the toughest security situation, we know we are on eve of war in Iraq ... I told the prime minister right now that I am willing ... to take on the position of foreign minister," Mr Netanyahu said.

Netanyahu would rather be prime minister than foreign minister

Mr Sharon had been wooing ultra-nationalist parties since Labor ministers pulled out of the government last week in a row over the funding of Jewish settlements.

On Monday, General Shaul Mofaz, a hardliner who has spearheaded Israel's crackdown on Palestinian militants, was confirmed as defence minister.

President Moshe Katsav said Mr Sharon had asked him to dissolve parliament at a meeting on Tuesday.

The elections are expected to take place on 28 January, in line with the law stipulating a 90-day run-up to the poll.

Despite surviving three no-confidence motions in the Knesset on Monday, Mr Sharon's position remained precarious.

He said that, since the "irresponsible" resignation of Labor Party ministers, he had been in touch with many political leaders to see if they would join the government.

"But all sorts of requirements were set which I could not agree to," he told a news conference.

"I will not throw away the good of the country for narrow-based party political considerations," Mr Sharon said.

The BBC's Jeremy Cooke in Jerusalem says Mr Sharon is taking a big political gamble by calling early elections.

Israel is still plagued by suicide bombings

He could have compromised - first with Labor and then with the right-wing parties - but he knows he needs to appear strong and uncompromising in leadership, our correspondent says.

While Mr Sharon has a strong lead in the opinion polls, Mr Netanyahu is hugely popular in the Likud ranks and could win the leadership contest, our correspondent says.

A leadership contest is also looming in the Labor Party - so while Israelis know they are going to the polls, they do not know who either of the main candidates for prime minister will be.

Political instability

Israelis now face a period of political uncertainty, as the elections coincide with a possible US-led war with Iraq.

The crisis is also exacerbated by the continuing Palestinian intifada, or uprising.

On Monday, a Palestinian suicide bomber blew himself up in a shopping mall in Kfar Saba, on the edge of Tel Aviv, killing himself and two Israelis.

After the Labor walk-out, Mr Sharon was left with the support of only 55 lawmakers in the 120-member parliament.

Labor is still suffering because of the failure of its last government to clinch a peace deal with the Palestinians.

Criticism

At the news conference, Mr Sharon criticised a far-right faction, the National Union-Israel Beitenu, which had snubbed his invitation to join the coalition.

Rejecting the faction's demands, he said: "I will not change the government's basic lines, nor impair the profound strategic agreements and understandings with the United States".

He also insisted that he would get the national budget passed "as soon as possible, without modifying the level of deficit".