JERUSALEM — Israeli Prime Minister Benjamin Netanyahu reached a deal Thursday to form a new coalition government, but a last-minute snag over the title of his new partners kept the plan from being formalized for at least one more day.
The new government is expected to try to curb years of preferential treatment for the country's ultra-Orthodox minority and may push for renewed Mideast peace efforts. But the late-hour disagreement reflects the tough challenges Netanyahu could face keeping his new coalition intact.
It would be the first in a decade to exclude ultra-Orthodox Jewish parties. It includes two new rising stars in Israeli politics who have vowed to end a controversial system of draft exemptions and generous welfare subsidies granted to tens of thousands of ultra-Orthodox seminary students.
"The next term will be one of the most challenging in the history of the state," Netanyahu told his Likud-Yisrael Beitenu parliamentary faction Thursday. "We are facing great security and diplomatic challenges."
After weeks of deadlock, Netanyahu wrapped up coalition negotiations overnight with Yesh Atid and the Jewish Home, a party aligned with West Bank settlers.
Later Thursday, however, the two parties — Yesh Atid and Jewish Home — accused Netanyahu of reneging on a promise to appoint their leaders as deputy prime ministers and all sides were in talks to resolve the dispute. Netanyahu's Likud Party had no comment on the allegation.
The issue was not expected to be a deal breaker and an agreement was still expected to be signed within a day so that the new government could be sworn in by Monday, just two days before Barack Obama is to arrive for his first visit as U.S. president.
Significant progress on talks on the peace front could prove to be more difficult than other domestic issues, given bitter disagreements among coalition members as well as deep differences with the Palestinians.
Nonetheless, Netanyahu's senior partner, the centrist Yesh Atid party, is vowing to at least make an effort to restart negotiations. The peace process remained frozen throughout Netanyahu's previous four-year term, when his right-wing bloc partnered with other hard-line and ultra-Orthodox factions.
"We have to begin talks with the Palestinians immediately. We need to sit at the negotiation table. We haven't sat there for four years," Yael German of Yesh Atid, who is expected to serve as the new health minister, told Israel's Army Radio. "Let's sit and proceed toward a peace agreement. It is essential."
Although Netanyahu's bloc emerged as the biggest faction in the Jan. 22 election with 31 seats, he struggled to form a coalition with the necessary 61-seat majority in the 120-member parliament. His new coalition is expected to control 68 seats.
The negotiations stalled over several thorny issues, including the division of key Cabinet portfolios and plans to reform the draft.
The ultra-Orthodox make up about 8 percent of Israel's 8 million citizens. Through the coalition government system, they have traditionally wielded disproportionate influence by ensuring a parliamentary majority for a string of prime ministers.
With the exception of a three-year period earlier this century, they have served in every government since the late 1970s.
The ultra-Orthodox parties used their kingmaker status to secure vast budgets for their religious schools and seminaries, which teach students about Judaism but very little math, English or science.
Tens of thousands of young ultra-Orthodox males are granted exemptions from military service in order to pursue their religious studies, and older men collect welfare stipends while continuing to study full time.
The system has led to high rates of unemployment and poverty in the ultra-Orthodox community. It also has bred widespread resentment among the secular and modern Orthodox publics.
Both Yesh Atid and Jewish Home appealed to voters by calling to end the contentious system. Forming a joint front in coalition talks, they forced Netanyahu to drop his plans to bring the ultra-Orthodox, his traditional partners, back into the coalition.
According to the deal, Lapid, who leads the second-largest party in parliament with 19 seats, was set to serve as the new finance minister with great influence over the budget. His party also would control the Education Ministry. With these two ministries, he is likely to curb funding to ultra-Orthodox schools and institutions.
Netanyahu's bloc would retain control of the key defense and interior ministries, giving his group the final say in military matters and over immigration policy.
Social issues weighed heavy in the election and campaign promises to improve lives for the middle class benefited both Lapid and Jewish Home's leader Naftali Bennett.
Nahum Barnea, one of Israel's most prominent political commentators, said the bad blood built up during coalition talks did not bode well.
Bennett and Lapid "are going to fill senior positions in a government under the leadership of a prime minister of whom they are openly contemptuous. Paranoia tends to grow rampant in governments of that kind," he wrote in the Yediot Ahronot daily. "The situation is particularly problematic when the two novices sitting at the Cabinet table aspire, each one independently of the other, to succeed him as the leader."
Hundreds of thousands of Israelis took to the streets in the summer of 2011 to demonstrate against the gaps between rich and poor, low wages and skyrocketing housing prices.
But the two parties take far different approaches to peacemaking with the Palestinians. Lapid has vowed to make a serious effort to reach peace. Yet his campaign made little mention of the issue, focusing heavily on his social and economic agenda, and critics have questioned his commitment.
Bennett, meanwhile, is a former leader of the West Bank settlement movement and opposes concessions to the Palestinians. He has even called for Israel to annex large chunks of the West Bank, the heartland of any future Palestinian state.
His nationalist party supports building settlements, citing biblical and historic reasons. With control of the Housing Ministry, it will have the budgets to promote new settlement construction.
Despite these disagreements, there could be room for optimism on peace.
After presiding over four years of deadlock and suffering international isolation over the issue, Netanyahu has signaled he is eager to restart negotiations with the Palestinians, although he has given no indication about whether he is prepared to make significant concessions.
He has appointed Tzipi Livni, a former foreign minister who now leads a small, dovish party, to serve as his chief negotiator. Livni has good working relations with the Palestinians.
The Palestinians demand all of the West Bank, east Jerusalem and Gaza Strip, areas captured by Israel in the 1967 Mideast war from Jordan, for a future state. They have demanded a freeze in settlement construction and a commitment to make Israel's 1967 lines the basis for a future border.
Saeb Erekat, the chief Palestinian negotiator, said the Palestinians would have "no problem" talking to Lapid or Livni. But he said the Israeli government "should accept the two-state solution based on the 1967 borders and implement its obligations like the settlement freeze."
The Obama visit could provide an opportunity to search for a new formula for negotiations. Obama will be meeting separately with both sides while he is in the region but already has said he is not planning a new peace initiative.
Netanyahu struggled to form a coalition, and required an extra two-week extension to wrap up the deal. If he does not form a coalition by Saturday, the country could be forced to hold a new election.