Prime Minister Ariel Sharon on Thursday began courting ultranationalist legislators to try to rebuild his coalition, left in a shambles by the departure of the center-left Labor Party. The political instability in Israel bodes ill for a new U.S.-backed peace plan, and Palestinian officials say they fear a government stacked with hardliners will adopt even tougher policies in the West Bank and Gaza Strip .

After Labor quit Wednesday because of a dispute over funding for Jewish settlements in the 2003 state budget, Sharon was left with a minority government that controls only 55 seats in the 120-member parliament.

The opposition might not muster 61 legislators needed to topple the government, but it will become increasingly difficult for Sharon to govern.

"Sharon ... will now learn what coalition hell looks like, with all the demands, the blackmail and the threats," wrote commentator Shalom Yerushalmi in the Yediot Ahronot daily.

Despite the unstable situation, Sharon was quoted as saying Thursday he would not seek elections ahead of the scheduled date - November 2003.

"I plan to make every effort to establish an alternative government," Sharon told Yediot. "I have no intention of ... initiating early elections."

Sharon offered the defense portfolio vacated by Labor leader Binyamin Ben-Eliezer to Shaul Mofaz, who served as occupation army chief of staff from 1998 until last June. A Sharon aide, Arnon Perlman, said Thursday that Mofaz has accepted. Mofaz returned to Israel late Wednesday from a trip abroad.

The main target of Sharon's courting is National Union-Israel Beitenu, a far-right grouping faction of seven legislators who oppose any negotiations with the Palestinians and advocate settlement expansion in the Palestinian areas.

The Israeli daily Maariv reported that Sharon has offered the faction's leader, Avigdor Lieberman, the post of foreign or finance minister. A legislator from the National Union, Benny Elon, said he was unaware of such an offer. Sharon's aides were not immediately available for comment.

However, Lieberman is a close ally of Sharon's key rival for Likud Party leadership, former Israeli Prime Minister Benjamin Netanyahu , and appeared in no hurry to join the government. Lieberman was quoted as saying before the breakup of the coalition that he prefers early elections.

Elon said the final decision was up to the faction. Elon said Sharon should be urged to adopt a more hard-line government platform, which he said would be more in line with the prime minister's right-wing convictions.

"We have to exploit the coming year to do things that he (Sharon) wanted to do but didn't succeed to do," Elon told Israel Radio.

Sharon's next test will come Monday when parliament votes on a number of no-confidence motions. The government would only fall if 61 legislators vote against it. In the same session, the Mofaz appointment reportedly will be submitted for approval.

Ben-Eliezer, meanwhile, came under intense criticism Thursday for having broken up the "national unity" government over 145 million dlrs in allocations to Jewish settlements. The disputed sum amounts to 0.3 percent of the entire 2003 spending plan of 57 billion dlrs.

Israeli governments traditionally don't reveal how much they spend on Jewish settlements. However, settlers have enjoyed generous tax breaks, grants and other subsidies over the years.

Critics said Ben-Eliezer's main motive was to improve his standing in his party ahead of primaries on Nov. 19. He trails two more dovish challengers, Amram Mitzna and Haim Ramon, and leaving the government over a settlement dispute could bring him votes.

Addressing parliament after his resignation, Ben-Eliezer laid out his platform for opposing Sharon, saying the government had no plans for peace with the Palestinians and had abandoned Israeli's poor.

"We have reached a situation where we have done everything possible militarily and we have reached the moment where the government must present its political vision," Ben-Eliezer told lawmakers.

Palestinian Cabinet minister Saeb Erekat warned that "if there is a new coalition between the Likud and the right wing in Israel it will also be at the expense of the Palestinian people and against the peace process."

Under Israeli law, the resignations take effect after 48 hours, leaving room for last-ditch maneuvers. But politicians from both sides assessed that Sharon's 20-month unity government was at an end.

The budget was put to parliament after the Labor ministers resigned, and it passed 67-45 with the support of parties outside the coalition. It must pass two more readings in coming weeks before it becomes final.

Wednesday's developments spell trouble for U.S. efforts to win support for a three-phase peace plan envisioning a provisional Palestinian state by 2003. Elections would mean a delay of many months, and Sharon's far-right partners in a narrow coalition likely would object to many of that plan's provisions, such as a settlement freeze and a significant Israeli troop pullback.

Labor joined forces with the hard-line Sharon after he routed their candidate in prime ministerial elections in February 2001, several months after peace talks failed and fighting with the Palestinians erupted.

But from the beginning the party was expected to bolt the coalition before the next election to try to position itself as a moderate alternative to Sharon.

Sharon and Ben-Eliezer have worked closely in leading the struggle against Palestinian resistance groups waging a campaign of activism in Israel - a campaign that escalated to the point that Israeli occupation troops reoccupied most of the Palestinian cities previous governments handed over to Palestinian self-rule.

But Labor's constituency has grown increasingly unhappy with Sharon's rejection of international efforts to find a way out of the fighting and his determination to crush the Palestinian uprising before any peace talks resume.

PHOTO CAPTION

Israeli Prime Minister Ariel Sharon participates in a Knesset, Israel's parliament, session in Jerusalem on Wednesday Oct. 30, 2002 before the vote on the 2003 draft budget in a first reading. Sharon's broad-based coalition crumbled Wednesday as Cabinet ministers from the moderate Labor Party resigned, ending a partnership which for 20 months had united Israel's bitter political rivals in a common front against the Palestinian uprising. (AP Photo/ Eitan Hess-Ashkenazi)