Netanyahu's Hard-Right Shift To Win Election Presents Troubles Ahead

By Luke Baker and Jeffrey Heller

JERUSALEM, March 18 (Reuters) - Prime Minister Benjamin Netanyahu won a come-from-behind victory in Israel's election after tacking hard to the right in the final days of campaigning, including abandoning a commitment to negotiate a Palestinian state.

In a pre-election blitz, Netanyahu made a series of promises designed to shore up his Likud base and draw voters from other right-wing and nationalist parties. He pledged to go on building settlements on occupied land and said there would be no Palestinian state if he was re-elected.

With 99.5 percent of votes counted on Wednesday, Likud had won 29-30 seats in the 120-member Knesset, comfortably defeating the center-left Zionist Union opposition on 24 seats, Israel's Central Election Committee and Israeli media said. A united list of Arab parties came in third.

It amounted to a dramatic and unexpected victory - the last opinion polls published four days before the vote had shown the Zionist Union with a four-seat advantage.

Although Netanyahu must still put together a coalition to remain in power, his victory all but guarantees that he will be given the first opportunity to form a government, putting him course to become the longest-serving leader in Israeli history.

But the promises he made to woo ultranationalist voters in the final days of the campaign, by effectively jettisoning the "two state" aim of more than two decades of Middle East peacemaking, could have far-ranging consequences, including deepening rifts with the United States and Europe.

In a statement, Likud said Netanyahu intended to form a new government within weeks, with negotiations already underway with the far-right pro-settler Jewish Home party led by Naftali Bennett, the centrist Kulanu party and ultra-Orthodox groups.

The critical party to get on side will be Kulanu, led by former Likud member and communications minister Moshe Kahlon, who won 10 seats, making him a kingmaker given his ability to side with either Netanyahu or the center-left opposition.

"Reality is not waiting for us," Netanyahu said. "The citizens of Israel expect us to quickly put together a leadership that will work for them regarding security, economy and society as we committed to do - and we will do so."

Isaac Herzog, the leader of the Zionist Union, conceded defeat, saying he had called Netanyahu to congratulate him.

The Tel Aviv stock market was largely unmoved by Netanyahu's victory, with the benchmark Tel Aviv 100 index up marginally at mid-day.

"The market's indifference to the results apparently stems from its belief that the coalition that will be formed will be more stable than its predecessor," said Idan Azoulay, chief investment officer at the Epsilon brokerage.

HARD ROAD AHEAD

While Likud is the largest party, the process of forming a coalition is hardly assured. It needs 61 seats in the Knesset and crossing that threshold will be challenging given the amount of division across Israel's political landscape.

Netanyahu's victory will prolong the country's troubled relationship with U.S. President Barack Obama.

The White House was already angry with him for addressing the U.S. Congress at the invitation of Republican lawmakers in a bid to scupper U.S. nuclear talks with Iran, before Netanyahu's hard tack to the right in the campaign's final days.

Saeb Erekat, chief Palestinian negotiator in peace talks with Israel that collapsed in April, said in a statement that Netanyahu's win showed "the success of a campaign based on settlements, racism, apartheid and the denial of the fundamental rights of the Palestinian people."

During much of the campaign, Netanyahu had focused on security issues and the threat from Iran's nuclear program, a message that appeared to gain little traction with voters.

The Zionist Union's focus on socio-economic issues, including the lack of housing and the high cost of living in Israel, appeared to be generating much more momentum.

But Netanyahu's move to the right, playing up fears of the spread of Islamist groups, promising no concessions to the Palestinians and raising alarm about growing support for Arab-Israeli parties, looks to have spurred his base into action.

From the Palestinian point-of-view, the results are a deep concern, raising the prospect of more settlement expansion on land they want for their own state in the occupied West Bank and East Jerusalem, as well as in Gaza.

If Netanyahu follows through on his pledges it would put him on a collision course with the Obama administration and the European Union, which has been weighing steps including trade measures to sanction Israel for its settlements policy.

Parliaments in historically pro-Israel countries including France and Britain have held non-binding votes favoring recognizing Palestinian independence. Western countries have generally held back from this step, arguing that a Palestinian state must emerge from negotiations, but with Netanyahu having apparently abandoned the "two state" principle of such talks, the argument is harder to make.

His victory also raises questions about what happens on Iran, with Obama determined to pursue negotiations towards a deal on Tehran's nuclear program and Netanyahu determined to scupper it, including by mobilizing domestic U.S. opinion.

The Palestinians may quickly create problems for Netanyahu as they will formally become members of the International Criminal Court on April 1 and have said they will pursue war crimes charges against Israel over its 48-year occupation of the West Bank and last year's war in Gaza.

Pre-empting those steps, Israel has suspended the transfer of tax revenue it collects on the Palestinians' behalf, holding back around $120 million a month. That has crippled the Palestinian budget and led to deep pay cuts for public sector workers. (Writing by Luke Baker, additional reporting by Steve Scheer and Ari Rabinovitch; Editing by Peter Graff)