Israel appears to be heading for an unprecedented third election within a year – prolonging a political stalemate that has paralysed the government and undermined many citizens’ faith in the democratic process.

Benjamin Netanyahu and his chief challenger, Benny Gantz, have for weeks insisted they want to avoid another costly election campaign that is expected to produce similar results. But neither has been willing to compromise on their core demands for a power-sharing agreement. Netanyahu’s recent indictment on corruption charges has added a murky legal imbroglio to the saga.

Following September elections, both men failed during their officially mandated time to form a governing coalition on their own. Then, in a final three-week window, they could not join forces to avoid another vote.

Both sides said they were working until the last minute to find a way out of the deadlock. However, a breakthrough seemed highly unlikely.

With a midnight deadline looming on Wednesday, both sides submitted legislation to dissolve parliament and schedule new elections on 2 March. If the bill is not passed by the deadline, new elections will automatically be triggered on 10 March.

Given Israel’s divided state, and the deep mistrust between the opposing camps, there is no guarantee that another vote will break the loop of elections and instability that has rocked the country for the past year.

Another campaign, and the national election day holiday, will cost the Israeli economy billions.

But there will be an even steeper price caused by nearly 18 months of caretaker governments that cannot carry out major legislation, make appointments or pass budgets, said Yohanan Plesner, the president of the non-partisan Israel Democracy Institute.

“The entire decision-making apparatus has been stalled and that has ample implications across the board,” he said. “Israelis are frustrated as a result of the fact that there is no decisive outcome. But there is also an understanding that we are in a very unique and unprecedented situation where a prime minister who is very popular within his own constituency is also being indicted with very severe crimes.”

The most straightforward way out of the stalemate would be for Gantz’s centrist Blue and White party to form a unity government with Netanyahu’s Likud. Together, they control a solid majority in the 120-seat Knesset.

Gantz’s party refuses to sit with Netanyahu, who was indicted last month on charges of accepting bribes, fraud and breach of trust. Netanyahu, Israel’s longest-ever serving leader, is desperately clinging to power to wage his legal battle from the favourable perch of prime minister. He has insisted on going first in any alternating leadership arrangement and has refused to drop his alliance with other nationalist and ultra-Orthodox Jewish parties.

Gantz has said he would make a deal with a different leader of Likud. But Netanyahu has so far managed to fend off a burgeoning insurrection inside his party, with just one major figure, Gideon Saar, daring to openly challenge him.

“If I am elected head of Likud, I will lead it to victory,” Saar said on Tuesday, citing polls that he was more likely to be able to build a stable coalition. “It is very clear, on the other hand, that if we keep the current course we will not get anywhere better than we have in the last two elections.”

With all the other top Likud officials lining up behind him, Netanyahu is expected to beat Saar in any primary vote.

Netanyahu is not legally compelled to step down after being indicted, but Israeli law is ambiguous about whether he could be given authority to form a new government after the next election. The attorney general, Avichai Mandelblit, who was harshly criticised by both sides throughout the lengthy process he took to press charges, will be required to rule on that question as well as before a likely court challenge.

Recent opinion polls have forecast a similar deadlock if new elections are held.

Avigdor Lieberman, a former Netanyahu ally, has emerged as a stubborn kingmaker, refusing to endorse either candidate while failing to coax them into a unity government.

The maverick politician, who takes a hard line against the Palestinians, has earned some newfound support in liberal circles by also taking a tough stand against ultra-Orthodox parties that hold great influence in Netanyahu’s governments. But he has also faced criticism for the extended impasse.

“Voting for Lieberman is a sure path to a fourth election,” wrote Matti Tuchfeld in the Israel Hayom daily. “Lieberman has turned into a one-man blocking majority. You can like him, agree with his opinions, you can love his zigzagging. No problem. But you have to know that a vote for him is a vote for continuing the political vacuum and a perpetual transition government.”