JERUSALEM, May 8 (Allyn Fisher-Ilan/Reuters) - Israeli Prime Minister Benjamin Netanyahu formed a unity government on Tuesday in a surprise move that could give him a freer hand to attack Iran's nuclear facilities and seek peace with the Palestinians.
The coalition deal, negotiated secretly over the past days and sealed at a private meeting overnight, means the centrist Kadima party will hook up with Netanyahu's rightist coalition, creating a majority of 94 of parliament's 120 legislators.
The coalition, which replaces plans announced just two days earlier for a snap election in September, will be one of the biggest in Israeli history.
This government is good for security, good for the economy and good for the people of Israel, Netanyahu told a joint news conference with Kadima's leader, Shaul Mofaz.
The new coalition would focus on sharing out the duty of military conscription among all Israelis, redrawing the national budget and advancing electoral reform, he said.
Ultra-Orthodox parties in the coalition had opposed plans to extend conscription to their supporters, who are now exempt.
Lastly it is to try to advance a responsible peace process ... Not all has been agreed but we have a very strong basis for continued action, the prime minister said, adding that he hoped the Palestinians would spot the opportunity and come sit with us for serious negotiations.
Of course one of the important issues is Iran, Netanyahu added in response to a question.
Environment Minister Gilad Erdan said the accord would help build support for potential action against Iran's atomic program, which Israel views as an existential threat.
An election wouldn't stop Iran's nuclear program. When a decision is taken to attack or not, it is better to have a broad political front, that unites the public, he told Israel Radio.
A spokesman for Palestinian President Mahmoud Abbas called on Israel to use the opportunity provided by the expansion of its coalition government to expedite a peace accord.
This requires an immediate halt to all settlement activity throughout the Palestinian Territories, spokesman Nabil Abu Rdainah said. The new coalition government needs to be a coalition of peace and not a coalition for war.
Peace talks have been suspended for 18 months in a dispute over Jewish settlement building in the occupied West Bank and Palestinians say they cannot resume unless such construction is frozen. Netanyahu has called for talks without preconditions.
Entering peace negotiations was an iron condition for forming the unity government, Mofaz said.
The coalition accord says the new administration will work towards the resumption of the peace process and promoting talks with the Palestinian Authority.
But it also noted the importance of maintaining defensible borders, a phrase Netanyahu has used in the past to deflect Palestinian demands for extensive Israeli withdrawal from the West Bank, territory captured in a 1967 war.
SIGNAL TO IRAN
Under the coalition accord, Mofaz, a former defense minister, will be named vice premier in the new government. He took over leadership of the Kadima party in March from Tzipi Livni.
As deputy prime minister in a former Kadima-headed government in 2008, Mofaz was among the first Israeli officials to publicly moot the possibility of an attack on Iran.
But the Iranian-born Mofaz has been more circumspect while in opposition, saying Israel should not hasten to break ranks with world powers that are trying to pressure Iran through sanctions and negotiations.
Gerald Steinberg, political scientist at Bar-Ilan University near Tel Aviv, said the coalition deal sends a very strong signal to Tehran, but also to Europe and the United States, that Israel is united and the leadership is capable of dealing with the threats that are there if and when it becomes necessary.
Israeli officials say the next year may be crucial in seeing whether Iran will curb its nuclear plans in the face of international condemnation and Western sanctions. Iran will discuss its nuclear program with major powers on May 23.
Israel has regularly hinted it will strike the Islamic republic if Tehran does not pull back. On Tuesday, Iranian foreign ministry spokesman Ramin Mehmanparast dismissed the threats of attack as propaganda.
Iran regularly rejects Israeli and Western accusations that it is working on developing a nuclear bomb, saying its program is focused on generating electricity and other peaceful projects. Israel is widely assumed to have the Middle East's only nuclear arsenal.
The next election was due in October 2013 but Netanyahu had pushed this month for an early poll after divisions emerged in his coalition over the new military conscription law. Parliament was preparing to dissolve itself and clear the decks for a Sept. 4 ballot while the backroom talks with Kadima were under way.
When it turned out it was possible to set up the biggest government in Israel's history ... I thought we could restore stability without elections, so I decided to set up a broad national unity government, Netanyahu said.
The accord stunned the political establishment and drew swift condemnation from the center-left Labor party, which had been touted in opinion polls to be on course for a resurgence at the expense of Kadima.
This is a pact of cowards and the most contemptible and preposterous zigzag in Israel's political history, Labor party leader Shelly Yachimovich was quoted as saying in the media, where commentators hailed Netanyahu's political prowess.
Kadima, with 28 seats, will add significant weight to the coalition, but it remains uncertain how it will get along with religious and ultra-right parties also in the cabinet.
Inter-government relations are likely to be tested swiftly over the issue of settlement building after the high court ordered the government on Monday to demolish five apartment buildings in a Jewish settlement in the occupied West Bank.
Many Netanyahu supporters want him to adopt legislation to legalize settlements, such as the Ulpana apartments, which a court has ruled were built on privately owned Palestinian land.
It is not clear if Kadima would support such a move, which would draw international condemnation on Israel. (Additional reporting by Ari Rabinovitch; writing by Jeffrey Heller; Editing by Douglas Hamilton and Philippa Fletcher)