Tzipi Livni, the leader of Israel’s ruling Kadima party, last night reportedly abandoned negotiations to form a new coalition government and will recommend an early general election after a key party pulled out of talks.

Livni, who had hoped to become the country’s first woman prime minister in more than three decades, is expected to inform President Shimon Peres of her decision later today.

Attempts to create a coalition failed after Livni was snubbed by the ultra-Orthodox Shas party when she refused to give in to its demands. Negotiations with another small religious party, Yahadut Hatorah, also appear to have collapsed last night. Their withdrawal ended Livni’s plans to form a majority coalition government with Labour, led by Ehud Barak, the defence minister.

A political source said that Livni “decided to opt for elections”. She will tell Peres that “we couldn’t give in to political blackmail and we should hold elections”, the source said.

A general election could take place next February. According to polls, Livni is likely to lose to Benjamin Netanyahu, the leader of the right-wing opposition Likud party.

The Kadima leader had hoped that her coalition government could reach a peace agreement with the Palestinians and prevent Iran from acquiring nuclear weapons.

Livni has said that she and Barak had planned to press ahead with the American-backed peace process. Likud, by contrast, has condemned the government’s peace moves and last week suggested Livni was prepared to sacrifice Jerusalem.

Talks with Shas foundered on Friday over the party’s huge financial demands and its insistence on a promise to keep Jerusalem entirely under Israeli rule, which would wreck peace negotiations with the Palestinians.

Shas, whose support is largely drawn from working-class Israelis, was demanding about £166m in increased spending, mainly on child allowances.

Last month Livni, 50, won the leadership of her party when Ehud Olmert, the outgoing prime minister, stepped down because of corruption allegations. After a month of negotiations, Livni announced a self-imposed deadline of today.

Yossi Beilin, a prominent left-wing MP, last week called on Livni to “take a brave step” and form a narrowly based coalition government with Labour and small left-wing parties.

It is widely believed that hopes of further talks about a Palestinian deal depended on Livni being able to form a government.

After meeting Livni today, Peres can take several days to hold consultations before notifying parliament she cannot form a government.

Under Israeli law, Peres also has the option of naming another party leader to form a government. This is seen as unlikely as the most popular alternative leader, Netanyahu, now lacks enough parliamentary seats to put together a government.

If Peres called an early election, Olmert, the outgoing prime minister, would remain in office until polling day.

“If Olmert stays in his post, he may strive for an agreement with Syria,” said one insider. In recent months Olmert has sent his advisers to talk to the Syrians. Israeli intelligence reported last week that Damascus was ready for peace talks with Israel.

“Early elections would be the worst possible outcome for the country,” said one Livni aide. “Olmert may try to leave his mark on history at the last possible moment. With the defence situation so uncertain, Israel needs a solid, stable government.”

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