Livni 'makes key coalition deal'

Ms Livni has said she will continue peace talks with the Palestinians

Israel's Kadima and Labour parties have reached a draft coalition deal that brings Tzipi Livni a step closer to becoming PM, her spokesman has said.

Ms Livni, the foreign minister, took over the Kadima party from outgoing PM Ehud Olmert last month when he stepped down to face corruption charges.

She is in talks with smaller parties as the Labour partnership would leave her short of a parliamentary majority.

Ms Livni has until November to form a government or elections are likely.

Opinion polls suggest that the right-wing Likud party, led by Binyamin Netanyahu, would be elected if an early vote were held.

Jerusalem's status

A deal with Labour would give Ms Livni 48 of the 61 seats in the Knesset that she needs to form the next government.

Correspondents say she still needs to persuade smaller parties to join the coalition, including the Jewish ultra-Orthodox Shas party if she wants a government that is not reliant on Israeli-Arab parties.

Both Labour - led by former Prime Minister Ehud Barak - and Kadima have said they will continue to pursue peace talks with Palestinian President Mahmoud Abbas.

The two parties were also partners in Mr Olmert's outgoing government.

But Shas, a crucial member of the coalition, has demanded that there be no negotiations with the Palestinians over the status of Jerusalem.

The Palestinians have demanded that east Jerusalem - occupied by Israel since 1967 - be the capital of a future Palestinian state, while Israelis consider the city their own "eternal, undivided" capital.

Israeli media reported that Mr Barak would be involved in negotiations with the Palestinians and Syria, but that Ms Livni had not granted his request to lead the Syrian track.

Kadima had also given some ground on Labour's demands for more funding for students and pensioners, reports said.