Israel's president was on Wednesday to task Benjamin Netanyahu with forming the next government after a shock election victory that exposed deep divisions with key ally Washington.

President Reuven Rivlin was to formally hand the task to Netanyahu after he secured enough support from his rightwing and religious allies to form a coalition, guaranteeing himself a third consecutive term as prime minister.

Netanyahu's victory last week dramatically exacerbated a diplomatic crisis with Washington, bringing his thorny relationship with US President Barack Obama into sharp focus.

In a bid to ramp up votes, Netanyahu veered sharply to the right, vowing there would be no Palestinian state on his watch, promising to increase settlement construction and warning that Arab Israeli voters were going "in droves" to the polls.

Although it secured Netanyahu a surprise win, with his rightwing Likud taking 30 of parliament's 120 seats, it appears to have cost him dearly on the diplomatic front, with Washington sparing no effort to make its displeasure known.

"The issue is a very clear, substantive challenge," Obama said of his disagreement with Netanyahu over the Israeli-Palestinian conflict.

"We believe that two states is the best path forward for Israel's security, for Palestinian aspirations and for regional stability... Prime Minister Netanyahu has a different approach."

His remarks were welcomed by the Palestinians.

"The US is finally coming to the realisation that Israeli actions are no longer acceptable," said senior Palestinian official Hanan Ashrawi.

"It is time for the US government to translate its statements into action and reconsider its unquestioning support of Israel and its military aid to Israel."

In an apparent bid to calm tensions, Netanyahu reportedly froze plans for further construction in annexed east Jerusalem, the Ynet news website reported.

Six of the 10 factions elected to parliament last week have thrown their support behind Netanyahu as the next premier, accounting for 67 seats in the Knesset.

Their backing was formalised during talks with Rivlin, who was to formally announce the name of the leader forming the next government at around 1730 GMT.

Netanyahu will then have four weeks to complete the task, although Rivlin can extend the deadline by another 14 days if necessary.

Wednesday's ceremony will be followed by weeks of coalition horsetrading as Netanyahu's potential partners battle for portfolios and prestige.

Moshe Kahlon, head of the newly formed centre-right Kulanu party and a former Likud member, has been offered the finance ministry.

Besides Likud and Kulanu, Netanyahu's new government is expected to include the far-right Jewish Home, the hardline anti-Arab Yisrael Beitenu and the two ultra-Orthodox parties, Shas and United Torah Judaism.

Netanyahu's inflammatory election rhetoric worsened an already acute crisis with Washington, with unprecedented expressions of mutual hostility, experts say.

Although he tried to backtrack on his comments on the two-state solution and issued a public apology to the Arab community, his efforts appeared to have little effect.

Several hours before Obama's remarks, the Wall Street Journal published a report in which US officials accused Israel of spying on nuclear negotiations with Iran aimed at reaching a deal that Netanyahu opposes.

And last week, the White House said it could withdraw crucial diplomatic cover for Israel at the UN Security Council as part of a policy rethink. Washington has traditionally used its veto to block UN resolutions seen as anti-Israeli.

In a bid to avoid further rancour, Netanyahu's office reportedly suspended plans for 1,500 settler homes in the settlement neighbourhood of Har Homa in annexed east Jerusalem, Ynet reported.

Har Homa was where Netanyahu pledged to build thousands of new homes on the eve of the election.

His office neither confirmed nor denied the report but said that plans which were slated for discussion this week would wait until the new government took office.

Daniel Seidemann, director of settlement watchdog Terrestrial Jerusalem, said given the crisis with Washington, the report had "a ring of truth" to it

"This would be a particularly inflammatory plan and I think he's afraid that the ceiling would cave in on him," he told AFP.