Interim Israeli Prime Minister Ehud Olmert signaled on Thursday he was open to right-wing parties joining a government he hopes to form but an associate said they must accept the idea of West Bank pullbacks.

Interim Israeli Prime Minister Ehud Olmert (C) meets with advisors and members of his staff in Jerusalem, March 29, 2006. [Reuters]

Negotiations to put together a coalition led by Olmert's centrist Kadima were expected to intensify next week after the party's smaller than expected win in Tuesday's election.

Final election results released late on Thursday showed Kadima won 29 seats in the 120-member parliament, gaining just one seat from earlier counts. To form a government it will need to align with at least three other parties.

The leading candidates were the centre-left Labour Party, the new Pensioners Party and one representing ultra-Orthodox Jews.

These parties are seen as most likely to agree to Olmert's plan to set Israel's final borders within four years with or without the agreement of its Palestinian neighbor.

But in an interview with Maariv newspaper, Olmert raised the possibility of bringing the right-wing Likud led by former Prime Minister Benjamin Netanyahu, or the ultranationalist Yisrael Beitenu, headed by Avigdor Lieberman, into the government.

"There is no reason not to talk to the Likud. I will also call on the Likud to hold negotiations. Nobody is ruled out," Olmert said.

Olmert did not set any government membership terms in the newspaper interview, although he has said in the past that all his political partners would have to accept his West Bank plan.

In the absence of peace talks, Olmert has vowed to draw the frontier by removing isolated Jewish settlements in the occupied West Bank and expanding bigger ones, a blueprint Palestinians said would deny them a viable state.

Palestinian President Mahmoud Abbas telephoned Olmert on Thursday to congratulate him on his election victory, Israeli officials said, noting pointedly the conversation did not touch on scheduling any talks between them.

Senior Kadima official Roni Bar-On noted there were strings attached to any offer to right-wingers to join an Olmert cabinet.

"I don't see why Lieberman can't be in the coalition -- if he accepts our diplomatic plan," Bar-On told Israel Radio.

Lieberman, in a separate interview with the radio, said he would be willing to examine the West Bank plan and that his main criteria for joining a government would be its commitment to Israel's security and "improving its international standing."

Israeli President Moshe Katsav is expected next week to ask Kadima officially to put together the next government, setting in motion formal coalition talks likely to last weeks.

But already the main point of contention has shaped up as the Finance Ministry, which Olmert has insisted Kadima controls.

Investors have reacted nervously to the prospect that Labour, which advocates raising the minimum wage and increasing welfare spending, may control the key economic portfolio.

Stocks have fallen by 2.5 percent since the election as economists speculated demands from Labour and other partners could cost as much as 4 billion shekels ($850 million) in social spending.

"The ministers in the government of Israel should be serious and responsible to correct what was done here in the last few years," said Avishai Braverman, a former World Bank senior economist and possible Labour candidate for finance minister.

Olmert told Maariv that Kadima's narrower than predicted victory caused "some discomfort" but would not hinder the party in establishing a stable government.

"We can form a coalition very quickly but this may undermine its stability ... or we can take our time and design a coalition government that will be stable and stay the course for four years," Eyal Arad, an adviser to Olmert, told Israel television.