Sunday night's meeting between Likud party leader Benjamin Netanyahu and Kadima's Tzipi Livni failed to produce an agreement between the two parties with the most seats in the new Knesset.

I will be taking Kadima into the opposition, Livni told reporters Sunday night, after their first meeting since the February 10 election. She cited profound differences over foreign policy as the reason that the two failed to agree on a government coalition and program.

Netanyahu has asked for another meeting - and I agreed. As far as I am concerned, this meeting has changed nothing.

Sources told the newspaper Haaretz before the talks that Likud party leader Benjamin Netanyahu had decided to ask Livni to join him in the Israeli cabinet.

Netanyahu was invited to form a coalition by Israeli President Shimon Peres after February 10 elections. He reportedly planned to offer Kadima two or three three major cabinet portfolios, according to reports.

Livni's party won the general election by one seat, but has fewer coalition partners than the right-wing Likud. Far right party Yisrael Beitanu won 15 seats in the vote, coming in third.

Reuters describes Netanyahu's options in building a governing majority in the 120-member parliament:

As prime minister-designate Netanyahu has 42 days to form a coalition and must then win parliamentary approval. If he fails, Peres can ask another legislator to form a government. His likely choice would be centrist Kadima party leader and Foreign Minister Tzipi Livni.

This broad government would be comprised of 70 Knesset seats, comprising Likud (27 seats), Kadima (28) and far-right Yisrael Beitenu (15).

The addition of smaller, right-wing religious parties could bring his total up to 95. Netanyahu may be able to entice Defence Minister Ehud Barak of left-wing Labour to join, though his party has said it would not join any Likud-led government.

Opponents of a grand coalition say policy clashes would paralyse Israeli-Palestinian peace efforts. Supporters say the parties could agree parameters for peace talks.

Netanyahu could also forge a narrow, Likud-led government of right-wing and religious parties with a slim majority of 65 seats.

Opposition to trading Israeli-occupied land for peace would be strong in such a coalition and this could lead to friction with the new Obama administration in Washington, which has pledged to move quickly on the Israeli-Arab peace track.

Some have advocated for Netanyahu to form a coalition government that rotates prime ministers between himself and Livni. This arrangement was tried in the 1980s, when the government led by Likud and then Labour lowered triple-digit inflation and began a partial Israeli troop withdrawal from south Lebanon.

Such an option seems unlikely now because Netanyahu has a clear mandate to head a new government and has said he would not agree to share the premiership with Livni.

Livni's deputies suggest they would work with Likud only under a power-sharing deal, and Netanyahu may opt for one to give him a stronger coalition that could avoid straining ties with the United States and Europe. (Reuters/Editing by Tim Pearce)