March 29 (Bloomberg) -- Israel's Ehud Olmert won election to succeed Prime Minister Ariel Sharon and challenged Palestinians to restart long-frozen peace talks, saying he will act unilaterally to fix his nation's borders if they don't.

Acting Prime Minister Olmert's Kadima Party won 28 of the 120 seats in parliament in yesterday's election, according to provisional results from Israel's Central Election Commission. The Labor Party came second with 20 seats. Olmert, the acting prime minister since Sharon's Jan. 4 stroke, may be able to assemble a coalition with Labor and the ultra-Orthodox Shas party that would have just more than half of the seats in the Knesset, the returns indicated.

``If the Palestinians act soon, we will sit at the negotiating table in order to create a new reality in our region,'' Olmert, 60, told supporters at a victory party in Neve Ilan, outside Jerusalem, early this morning. ``If they don't, Israel will take its fate into its own hands.''

Olmert and Sharon, 78, who remains in a coma, split Kadima off from the Likud party in November and announced their intention to set Israel's permanent borders with the Palestinian Authority. Kadima sapped Likud's support while also attracting voters from Labor and other parties who favor continued withdrawal in the West Bank after last year's exit from the Gaza Strip.

Likud, led by former Prime Minister Benjamin Netanyahu, took only 11 seats, according to the results, down from 40 in the previous Knesset before the split and falling to fifth place. Shas had 13 seats while Israel Beiteinu, or ``Israel Is Our Home,'' a party dominated by immigrants from the former Soviet Union, came in fourth with 12 seats. Final official results are due on March 31.

`Crushed and Broken'

Netanyahu told supporters in Tel Aviv the party had suffered a ``heavy blow'' in the election. He said it was the second blow to the Likud, following Sharon's departure, which ``left the movement crushed and broken.''

Olmert inherited the broad outlines of a policy of unilateral withdrawal in the West Bank from Sharon. In the past two weeks, Olmert has clarified the timing and extent of the planned pullback, marking a break with Israel's previous governments and with his two biggest rivals for the post of prime minister.

``This is the closest we've come in years to consensus in Israeli politics,'' said Jonathan Speyer, a political scientist at the Interdisciplinary Center Herzliya, a college and research center north of Tel Aviv. ``Kadima hit a chord when Ariel Sharon said it's time to get out of these territories.''

Hamas Cabinet

Three weeks after Sharon's stroke, the Islamic movement Hamas, which is classified as a terrorist organization by the U.S. and European Union, won elections to the Palestinian Legislative Council. Yesterday, the council, based in the West Bank city of Ramallah, approved a new Hamas-proposed Cabinet. Hamas refuses to recognize Israel and be bound by previous peace agreements signed by the Palestinian Authority.

Olmert says he will refuse to negotiate with Hamas. In the past two weeks, he has said he wants to evacuate most West Bank settlements and set the country's borders by 2010. Polls show a majority of Israelis support Olmert's idea of unilateral withdrawal.

He addressed his remarks today on restarting peace talks to Palestinian Authority President Mahmoud Abbas, who belongs to the Fatah Party and is still committed to a negotiated solution. Olmert never met with Abbas as acting prime minister and Sharon's last summit with the Palestinian leader was in June 2005.

`Time He Needs'

The Bush administration is likely to back Olmert's plan because it is consumed with Iraq and wary of peacemaking while Hamas is governing the Palestinians, U.S. analysts said.

David Makovsky at the Washington Institute for Near East Policy said Bush will give Olmert ``the time he needs'' to prepare for any pullout.

British Prime Minister Tony Blair congratulated Olmert on his election by phone while on a visit to Auckland, New Zealand.

``We hope very much that there emerges a government in Israel that is prepared to and able to take forward the process of peace and reconciliation,'' Blair said. ``I believe still that a resolution of the Israel-Palestine issue is as important as anything else in bringing peace to the world.''

Netanyahu, 56, opposes unilateral measures while remaining skeptical about the Palestinians' ability to deliver their side of any bargain with Israel.

Sharon's Vision

Yaakov Tzippo, a 45-year-old grocer in Tel Aviv's Ramat Gan suburb, said he voted Kadima because he admired Sharon. ``He wanted to make important changes in this country and I hope Olmert will be able to carry out his vision.''

The election commission said 63.2 percent of Israel's 5 million voters went to the polls. That was the lowest turnout for a parliamentary election ever in Israel and 5.7 percentage points less than the previous vote in 2003. The rate was 62.3 percent in 2001 when there was a direct election for prime ministers without parliamentary seats in contention.

The results gave Olmert's Kadima fewer seats than opinion polls before the election had forecast. Surveys in the newspapers Yediot Aharonot and Ma'ariv two days ago had predicted 34 seats for the party.

Israel's main stock index declined today after the narrower-than-expected victory. The TA-25 Index dropped 15.56, or 1.9 percent, to 821.57 at 12:05 p.m. local time. The percentage move was the biggest among equity markets included in global benchmarks.

`Strain on Budget'

``Building a coalition government will likely cost more than expected, straining Israel's budget,'' said Saar Golan, a trader at Leader & Co. in Tel Aviv.

The Labor Party, led by union activist Amir Peretz, 53, intends to join Kadima, and adding Shas would give the coalition a bare majority of 61, according to the results.

Two parties emerged as unexpectedly big vote-getters, Israel Beiteinu and Gil, the party representing pensioners. Gil, or ``Age,'' which Ma'ariv saw winning no more than two seats, emerged with seven. The single-issue party may also be a coalition partner for Olmert.

``The government we thought most likely to be formed is still the most likely,'' said Gadi Wolfsfield, a professor of political science at the Hebrew University in Jerusalem. ``Kadima will go with Labor and possibly Shas. But now the pensioners add a new dimension.''

Three parties opposed to Olmert's plans for unilateral withdrawal from the West Bank -- the Likud, Israel Beiteinu and National Union-National Religious Party -- will have 32 seats.

To contact the reporters on this story: Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net; Gwen Ackerman in Jerusalem at gackerman@bloomberg.net.

Last Updated: March 29, 2006 05:41 EST