Oct. 27 (Bloomberg) -- Israeli Foreign Minister Tzipi Livni's call for early elections after her failure to assemble a governing coalition is likely to put Middle East peacemaking on hold for months.

``This will stop the peace process,'' Dov Weissglas, who was a senior aide and negotiator for former Prime Minister Ariel Sharon, said in a telephone interview.

Livni told President Shimon Peres at his Jerusalem residence yesterday that she was unable to put together a new coalition after more than a month of negotiations. She asked him to call national elections in early 2009. Peres said he'd consult all parties in parliament before deciding by Oct. 29.

``The peace process could be delayed up to a year,'' Uzi Baram, a political strategist and former cabinet minister from the Labor Party, said in an interview. ``We have to have elections, then a government will have to be formed and then it will take time until that government begins functioning fully.''

Livni's move leaves Middle East peace efforts in limbo after a year in which she led the team negotiating with the Palestinian Authority. A decision to hold early elections effectively rules out the chances of meeting a year-end deadline set by President George W. Bush for reaching an Israeli-Palestinian peace agreement. Bush leaves the White House in January, and Palestinian Authority President Mahmoud Abbas is also coming to the end of his four-year term.

``It's clear that with the Israeli, Palestinian and American leaders all at the end of their tenures, they are unable to push anything through,'' Weissglas said.

Latest Poll

Livni, 50, said after meeting with Peres that she expects to win the new election. Her Kadima party would win 31 seats to 29 for Likud, headed by former Prime Minister Benjamin Netanyahu, if elections were held now, Channel 2 reported on Oct. 24, citing TNS Teleseker.

Of the 120 seats in the Knesset, or parliament, Kadima now has 29 and Likud, 12.

Although she still had authority to conduct coalition talks for another week, Livni brought the negotiations to a halt after rejecting the demands of the ultra-Orthodox Shas party, a current Kadima coalition partner. She was also in a stalemate with at least two other parties.

``I was ready to pay a price to establish a government but through the end I wasn't ready to mortgage the economic and political future of Israel,'' Livni, 50, said after a seven- minute talk with Peres.

Shas Demands

Shas, which represents a constituency of large families, wanted an increase of at least 1 billion shekels ($261 million) for child allowances. It also sought assurances that Livni would not compromise on Jerusalem in talks with Palestinians.

Peres, 85, authorized Livni last month to try to assemble a government after the resignation of Kadima Prime Minister Ehud Olmert, who is trying to clear himself of corruption allegations made in at least six different cases being investigated by police. Olmert could remain as a caretaker leader for another four months before a new government is elected.

Calling an election will almost certainly preclude parliamentary approval of the 2009 budget by the Dec. 31 deadline, a delay Finance Minister Ronnie Bar-On has said would undermine confidence in the economy. It would leave policy adrift at a time when the global financial crisis may require government intervention.

Stocks, Bonds Fall

The benchmark TA-25 index of stocks dropped to a three-year low, falling 2.8 percent, to 744, after U.S. and European markets fell on concern the global economy is sliding into a recession. Israeli government bonds dropped for a third day.

``There is no doubt that in this period, this is not good for us,'' said Shraga Brosh, president of the Manufacturers' Association of Israel. ``To go to a transitional government for four to five months, which in effect is a government of paralysis, is a very significant problem for the economy.''

Leaders of the Palestinian Authority said the developments were an internal matter for Israel and expressed hope that negotiations would continue whoever leads the government.

``We do not want to make peace with one faction in Israel,'' Palestinian negotiator Saeb Erekat said in a telephone interview. ``We want peace with all Israelis.''

To contact the reporter on this story: Peter Hirschberg in Jerusalem at phirschberg@bloomberg.net; Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net

Last Updated: October 26, 2008 18:09 EDT