Power Struggle

"The chances of Livni forming a government amount to zero," said Avraham Diskin, a political scientist with Hebrew University in Jerusalem, a sentiment echoed in much of the media following Tuesday's election.

The final tally after military and overseas votes were counted confirmed on Thursday that Livni's Kadima narrowly emerged as the top party with 28 seats.

However, that was far short of the 61 MPs the foreign minister would need in the 120-member parliament to form a governing coalition.

Former premier Netanyahu's Likud party was confirmed as having garnered 27 seats, which means he would also have to engage in some political horse-trading if he is to regain his old job.

The majority of the remaining seats went to other parties of the right, with the far-right Yisrael Beitenu of Avidgor Lieberman taking 15. The Labour party slipped into fourth place with 13 seats.

Both Livni and Netanyahu had claimed victory immediately after the cliffhanger election, leaving Israel potentially facing weeks of political turmoil as they scramble for support from the smaller parties.

Public radio on Thursday reported Livni as saying that "the official results confirm that the people pronounced in favor of Kadima."

But Likud issued a statement accusing Kadima of "making use of fictional reality since most of the people want Netanyahu" back in power.

New kingmaker Lieberman has added a dose of suspense to the political haggling by refusing to say whom he will support.

Fears for peace progress

The Palestinians have voiced fears for peace talks after the vote, which came three weeks after a devastating Israeli offensive on Hamas-run Gaza, while Arab media said the ballot was a victory for extremists like Lieberman.

"It is obvious that Israel will not get a government capable of continuing the negotiations," said Yasser Abed Rabbo, a top aide of Palestinian president Mahmud Abbas.

Despite his higher chances of becoming the next prime minister, Netanyahu is walking a political tightrope, analysts say.

He is widely believed to want a unity government including Kadima to give him a solid majority in parliament and avoid the risk of a short-term government, which analysts warn would be the case with a strictly right-wing coalition.

A narrow right-wing government would include parties opposed to dismantling settlements and territorial concessions in peace talks and would put Netanyahu at odds with the administration of US President Barack Obama, analysts say.

"Netanyahu would very much like Kadima to join his government and he would be willing to give a lot for this to happen," wrote Maariv.

But Livni has insisted that as the winner of the election, she should lead a unity government.

So Netanyahu is planning to approach Kadima via a circuitous route.

"He believes that if he can convince parties representing 61 MPs to recommend him to the president, Kadima will also join him: Its members are not cut out to sit in the opposition," said the mass-selling Yediot Aharonot.

"When they join, he will be able to throw out the extreme factions and form the same government that he intended to form from the beginning," it said.

Hardliners want strong action from Netanyahu

But Yaacov Katz, head of the National Union party which represents settlers and will have four seats in parliament, insisted he would not fall for the bluff.

"If we have the slightest doubt that as a result of our recommendation Bibi will be sitting in the next government with Tzipi Livni and negotiating Annapolis, (the creation of) another Arab country between the sea and the Jordan River, giving away parts of the Land of Israel and dealing improperly with the outposts, the chances we'll recommend him are close to nothing," Katz told the Ynet news website.

Another solution would be a rotation in a unity government, a scenario in Israel in 1984 when the two main parties shared the prime minister's post.

Netanyahu has ruled out such an option, however.

The EU presidency in a statement said the European Union "looks forward to working with the new Israeli administration to achieve the most important goal of all: a peaceful resolution of the Israeli-Palestinian conflict."

Meanwhile a truce between Hamas and Israel is expected to be announced within the coming few days after the Islamist Palestinian group gave its final reply on an Egyptian proposal on Thursday.

Long truce agreed between warring parties

Sources, who took part in meetings between the Hamas delegation in Cairo and Egypt's intelligence chief Omar Suleiman, were quoted by the official MENA news agency as saying that both sides had reached an agreement of an 18-month truce between Hamas and Israel.

Hamas officials said they were still waiting for Israel to approve the details of the emerging agreement.

The agreement would ensure the lifting of Israel's blockade of the Gaza Strip, the reconstruction of the strip and opening of border crossings, sources said.

Egypt has been brokering parallel, indirect talks between Hamas and Israeli negotiators to establish a lasting ceasefire, that would replace the fragile calm that ended Israel's devastating 22-day offensive in Gaza on January 18.

Also Thursday, Mussa Abu Marzouq, a senior member of the group, told al Jazeera news channel that a truce will most likely be announced within the next few days.

Abu Marzouk told the Doha-based television station that Egypt has agreed to work with Israel to make new arrangements for reopening Gaza's crossing into Egypt, without giving any details.

Egypt attempts to heal Palestinian divisions

Besides mediating a truce, Egypt is also trying to reconcile Hamas and President Mahmoud Abbas' rival Fatah group, and form a unity government that can move ahead with peace negotiations with Israel.

Marzouq also said that Egypt invited both Fatah and Hamas for direct talks soon.

Representatives of rival Palestinian movements Fatah and Hamas have held preliminary talks in Cairo this week, in what Egypt hoped will be the first of many meetings on forming a national unity government.

"Other factions will be invited later for all-inclusive reconciliation talks," he added.

Egypt has invited Palestinian factions to attend reconciliation talks in Cairo, scheduled for February 22.

Cairo has been trying to broker reconciliation between Fatah and Hamas since September 2008. But the last round of talks stalled in November, when Hamas refused to continue participating in meetings Abbas released Hamas supporters held in Fatah-controlled prisons in the West Bank.