An ultra-Orthodox Jewish party run by an octogenarian rabbi who has said Hurricane Katrina was divine punishment is emerging as the kingmaker in forming the next Israeli government.

After narrowly winning the Kadima Party leadership, Foreign Minister Tzipi Livni is likely to need Shas as a partner to become prime minister.

But Shas opposes any compromise on Jerusalem, and including it in a coalition could tie Ms Livni's hands in peace talks with the Palestinians.

Ms Livni wrested a narrow victory in the election to replace the corruption-tainted Prime Minister Ehud Olmert as chairman of the governing Kadima Party.

Under Israel's political system, she can become prime minister if she can put together a coalition government of her own.

Ms Livni has said she would like to keep the current four-party coalition intact.