Former TV anchor Yair Lapid, whose centrist Yesh Atid shot to prominence in Israel's elections, was Thursday at the heart of Benjamin Netanyahu's coalition talks, after rejecting a centre-left alternative.

Lapid's nine-month-old party, which campaigned on socio-economic issues and stunned the political establishment by winning 19 of the Knesset's 120 seats, has emerged as the partner of choice for Prime Minister Netanyahu after the poor showing of his Likud-Beitenu list.

The premier quickly pledged to build the "broadest possible coalition," saying it would focus on internal social issues, in the clearest indicator yet he was eyeing Lapid as a key player.

On Wednesday night, Lapid wrote off the option of building a blocking majority of centre-left and Arab parties, which exit polls said had won 60 seats, but was expected to drop one mandate when final results came out Thursday as the rightwing-religious bloc's number rose to 61.

Lapid's emergence on the political scene and his likely inclusion in Israel's next government is expected to give a centre-right bent to the incoming administration, rather than a swing to the right as had been long predicted by pundits and analysts.

The negotiations are being closely watched at home and abroad for indicators on how Israel's new government will handle pressing diplomatic and foreign policy questions, including the deadlocked peace process and the Iranian nuclear threat.

"It's Lapid who will set the rules of the game," wrote Barak
Ravid, diplomatic correspondent for Haaretz newspaper.

Commentators said Netanyahu wanted Lapid in government, giving their two parties 50 seats, but accommodating him would complicate efforts to build a stable coalition.

A central plank of Lapid's campaign was a more equal "sharing of the burden," a euphemism for compelling the ultra-

Orthodox to serve in the military, which is anathema to the ultra-Orthodox parties Shas (11 seats) and United Torah Judaism (7).

"For at least some of Lapid's supporters ... a government that is based on reaching an equal sharing of the burden is synonymous to a government without ultra-Orthodox parties," said the top-selling Yediot Aharonot, suggesting a coalition including rightwing Jewish Home (11), the centrist HaTnuah (6) and the centre-right Kadima (2).

But any alliance with Jewish Home, which rejects the concept of a Palestinian state, would likely stymie a renewal of peace talks, and Lapid has said he would not join a government that refused to engage in negotiations.

Ofer Shelah, a senior member of Yesh Atid, reiterated that point on Thursday.

"It is wrong to say that the peace process is not important for us. We made relaunching it one of our conditions for entering government," he told Israel's public radio.

Some Yesh Atid members would prefer to sit in a coalition with Shas, keeping Jewish Home leader Naftali Bennett in opposition, "which would make it possible for the new government to promote negotiations with the Palestinians," Yediot said.

Such a lineup could include the centrist HaTnuah and Kadima, giving it a majority of 69.

"Lapid will be a decisive factor in the government's composition, and will therefore be able to demand quite a bit from Netanyahu," the paper added.

During the election campaign, Lapid said the Palestinians would have to recognise that large Jewish settlement blocs would remain within Israel, but said there would be no new construction during negotiations, other than to accommodate "natural growth" in existing settlements.

He has also made clear that he does not accept the claim that there is no partner for peace on the Palestinian side.

Israel's public radio said Netanyahu could accommodate such a position by agreeing to make gestures towards the Palestinians or by accepting an interim peace agreement, although Palestinian president Mahmud Abbas has ruled out accepting an interim offer.

The issue of how to handle Iran's nuclear programme, which Israel and much of the West believes is a guise for a weapons drive, was unlikely to be a point of friction in the new coalition talks, analysts said.

"Regarding Iran, Netanyahu knows perfect well that the ball is in (US President) Barack Obama's court," said Chico Menashe, public radio's diplomatic correspondent, indicating that Netanyahu's ability to put pressure on the international community had significantly weakened.