* Netanyahu held foreign ministry post open for Lieberman

* Far-right leader's return could complicate peace efforts

JERUSALEM, Nov 10 (Reuters) - The Israeli cabinet approved on Sunday the return of far-right leader Avigdor Lieberman as foreign minister after his acquittal on corruption charges, in a move that could further complicate peace talks with the Palestinians.

Lieberman stepped down last year when he was indicted. His reinstatement to the role, which Prime Minister Benjamin Netanyahu had held open for him, is likely to harden the tone of Israeli diplomacy.

As head of the far-right Yisrael Beitenu party, which is allied with Netanyahu's Likud, Lieberman has been outspoken in his scepticism about the U.S.-sponsored negotiations that resumed in July after a three-year impasse, saying that reaching a permanent peace deal was impossible.

Netanyahu last week painted a grim picture of the talks, saying they had failed to make progress. Visiting U.S. Secretary of State John Kerry warned Israel it could face a third Palestinian uprising if they failed.

An Israeli government official, who asked not to be identified, said the cabinet endorsed Lieberman's appointment at its weekly meeting but that final approval was needed from parliament.

A Jerusalem court on Wednesday acquitted Lieberman on charges of fraud and breach of trust stemming from allegations he had given an Israeli diplomat an ambassador's post in exchange for a tip-off about a police probe into his affairs.

Lieberman, an immigrant from the former Soviet Union, has stirred controversy by questioning the loyalty of Israel's Arab citizens and proposing some Arab communities in Israel be shifted to Palestinian control in a land-for peace deal.

He has also called for the removal of Palestinian President Mahmoud Abbas, describing him as an obstacle to peace.

In his previous government, Netanyahu had largely sidelined Lieberman in Israel's dealings with its main ally, the United States, and other Western powers.

But political analysts said Lieberman may be given a more prominent diplomatic role in the administration Netanyahu formed in March in return for helping the prime minister fend off any challenge from an ultranationalist newcomer in the cabinet, Naftali Bennett, and hardliners within Likud.

Some political commentators, however, see Lieberman as a potential rival to Netanyahu in any future election, now that the corruption case is behind him. (Reporting by Ari Rabinovitch, Editing by Jeffrey Heller and Mark Trevelyan)

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