Tzipi Livni recommended Mr Peres call elections 'without delay'
The leader of Israel's governing Kadima party, Tzipi Livni, has recommended holding general elections after failing to build a coalition government.
Ms Livi told Israel's President Shimon Peres that she had abandoned her attempts to form a majority.
"The people will choose their leaders," she said.
Mr Peres has three days to consult, but correspondents say it is now almost certain that elections will be called for early next year.
Ms Livni had set other parties a Sunday deadline to join Kadima in government.
But the key Shas party turned her down, prompting her to say potential partners had made "economically and diplomatically illegitimate" demands.
"I could have stood here today and presented a government. I was ready to pay a certain price... but I wasn't ready to mortgage the future of Israel," she said after meeting Mr Peres.
"I have informed the president that under the existing conditions we should go to elections without delay."
If Mr Peres' consultations fail, any other Israeli MP can attempt to form a governing coalition over the next three weeks.
But correspondents say no other coalition is likely to emerge and Ms Livni's decision will effectively lead to new elections, which look set to be held in February.
The next parliamentary poll had been scheduled for 2010.
Opinion polls suggest Ms Livni could face a tough fight in an early election against the right-wing Likud party.
After her election as Kadima leader last month, Ms Livni was asked to form a government to replace that of outgoing Prime Minister Ehud Olmert.
He is stepping down amid corruption allegations, but will remain in office until a new government is formed.
Kadima holds 29 seats in Israel's 120-member Knesset and has secured a draft coalition agreement with the centre-left Labour party, which has 19 seats.
Shas, an extra-Orthodox party, has been a crucial ally in Mr Olmert's coalition, with 12 seats.
ISRAELI KNESSET SEATS
Current coalition (65 seats):
Kadima (centrist): 29
Labour (centre-left): 19
Shas (religious): 12
Likud (centre-right): 12
Yisrael Beitenu (right): 11
National Union-National Religious Party (religious): 9
United Torah Judaisim (religious): 6
Meretz (left): 5
Arab parties: 10
*Special interest party which split into factions
But on Friday, Shas pulled out of talks for a new coalition, saying its two key demands - to increase child welfare payments and keep Jerusalem off the negotiating table with the Palestinians - had not been met.
On Sunday, Ms Livni issued a statement saying: "When it became clear that everyone and every party was exploiting the opportunity to make demands that were economically and diplomatically illegitimate, I decided to call off (talks) and go to elections."
Tzipi Livni has a reputation for being understated, but reports from her camp suggested she exploded with frustration at the demands being placed on her by smaller parties, says the BBC's Tim Franks in Jerusalem.
Earlier, she told Haaretz newspaper she was "not willing to be blackmailed" and the alternative to early elections was "for me to capitulate to extortion".
Binyamin Netanyahu, the leader of the right-wing main opposition Likud party, appears to be the main beneficiary of Ms Livni's failure, says our correspondent.
Latest opinion polls suggest the election will be a close race between Likud and Kadima.
There is a chance, though, that her relative freshness on the Israeli political stage, along with her refusal to succumb to all the smaller parties' demands, may play well with the Israeli electorate, says our correspondent.
The next few months, leading to an election, will be full of insults and tumult, he says, and the chances of immediate diplomatic progress are, in that case, unlikely.
As foreign minister, Ms Livni had been heading negotiations with the Palestinians, but they have effectively ground to a halt.
On Sunday, chief Palestinian negotiator Saeb Erekat told the BBC that if Israelis were to choose to hold elections, no significant talks could take place before then.
US President George W Bush had hoped to have a Middle East peace deal by the time he leaves office in January.