HIGHLIIGHTS|| So-called 'Terrorism' & Gulf War Top on Sharon's Second Term Agenda|| Likud Replaces Labour as Biggest Party in Parliament|| Shinui Sweeps into Third place Replacing Ultra-Orthodox Jewish Parties as Political Power Brokers|| Katzav Expected to ask Sharon to Form a New Government|| STORYPrime Minister Ariel Sharon's Likud party rode to victory in an Israeli election on a wave of support for his tough line with Palestinians, humiliating leftist parties that had pursued Middle East peace deals.

Greeted by flag-waving supporters who burst into song, Sharon claimed victory early on Wednesday and urged parties to join him in a broad government to meet the twin challenges of what he called terrorism and a possible Gulf war.

Labour Party leader Amram Mitzna conceded defeat in a telephone call to Sharon soon after voting ended on Tuesday. Partial results showed Likud storming back into power, replacing Labour as the biggest party in parliament.

Labour endured its worst-ever defeat, falling to around 19 seats from 25 in the 120-seat parliament, reflecting Israelis' widespread outrage at the party's has put its trust in Palestinian President Yasser Arafat to make peace.

Labour's former partner in peace moves, the leftist Meretz party, was shown winning around 7 seats, down from 10, while Likud soared to 37, up from 19 in the current Knesset.

Further underscoring divisions, the upstart Shinui party swept into third place vowing to take away from ultra-Orthodox Jewish parties their historical role as political power brokers able to demand cash and benefits for their constituencies.

President Moshe Katzav was expected to ask Sharon to form a new government to tackle a deep economic crisis and the Palestinian revolt for an independent state.

"This is a heavy blow to a peaceful settlement. The Israelis have committed a historical mistake which they and the Palestinians will regret," Palestinian Information Minister Yasser Abed Rabbo said.

AT ODDS WITH WASHINGTON

Sharon fears forming a right-wing coalition that could put Israel at odds with chief ally Washington over such issues as building Jewish settlements on occupied land, while the Bush administration prepares for possible war with Iraq.

The future of peacemaking with the Palestinians will be shaped largely by which parties join a coalition, and a hard-line coalition could harden Sharon's already tough line against the Palestinian uprising.

Mitzna said Labour would be a "fighting opposition and an alternative" to a right-wing government. Labour bolted Sharon's government in October, forcing a new election.

"Sharon hopes the Labour Party will again serve as a fig leaf to his failed policy," Mitzna said in a concession speech to cheering supporters. "We do not intend to join, but to replace him."

Election officials said that with more than 97 percent of the polling stations counted, Likud would hold 37 seats, Labour 19, Shinui 15, the ultra-Orthodox Shas 10, Meretz 7 and the far-right National Union 7.

The National Religious Party would win 5 seats, United Torah Judaism 6, Hadash 4, two Arab parties 5, the immigrant party Yisrael B'Aliya 2, and the welfare One Nation 3.

'WE WILL CHANGE ISRAELI SOCIETY'

The leader of Shinui, Nazi Holocaust survivor Yosef "Tommy" Lapid, riding a wave of public resentment over the military exemptions and other privileges reserved for religious Jews, immediately went on the offensive.

"We will change the face of Israeli society," the 71-year-old pundit-turned-politician told cheering supporters in Tel Aviv. "We will fight religious coercion and we will draft every Jew into the army."

Sharon will have 28 days to form a government but can be given up to 14 more days if, as expected, he finds it difficult to build a coalition. If Sharon fails, Katzav will ask another newly elected Member of Parliament to try.

Turnout among the 4.7 million registered voters was the lowest for a general election in Israel's history -- 68.5 percent compared to an average of 78 to 80 percent.

PHOTO CAPTION

Israeli Prime Minister Ariel Sharon (R) is congratulated by Foreign Minister and former Prime Minister Benjamin Netanyahu, after making his election victory address at his headquarters in Tel Aviv, January 29, 2003. (Paul Hann