JERUSALEM (Reuters) - Israel headed on Sunday toward an early election likely to kill any remaining chances for a peace deal with the Palestinians this year, after ruling party leader Tzipi Livni dropped efforts to form a government.

“I notified the president that under the current circumstances, we should hold an election, without delay,” Livni said after meeting Shimon Peres, Israel’s head of state.

Livni, head of the centrist Kadima party, said prospective political partners had made “impossible demands” in weeks of bargaining, in which the ultra-Orthodox Shas faction had sought a steep boost in social welfare spending.

“There are prices that can be paid. There are prices others are ready to pay, but I’m not willing to do so at the expense of the country and its people, just to be prime minister,” Livni said in broadcast remarks.

Israeli media said Livni’s centrist Kadima party would table a bill to dissolve Parliament on Monday, and set a new election date, when lawmakers convene after a long summer recess, but the motion would not necessarily come to an immediate vote.

Political commentators forecast a parliamentary election would be held on February 17, more than a year ahead of schedule. Last month, Peres asked Livni to form a government after Prime Minister Ehud Olmert, hit by a corruption scandal, resigned.

Olmert remains prime minister until a new government is formed.

Peres said that in accordance with legal procedures, he would consult over the next three days with political leaders parties, adding: “Elections are no tragedy.”

Once he has held those meetings, Peres can then set into motion a process leading to an election in three months’ time.

Most opinion polls have predicted the right-wing party of former Prime Minister Benjamin Netanyahu, an opponent of wide-ranging territorial compromise, would win the ballot.

PEACE NEGOTIATIONS

“We hope the Israelis will choose to stay the course with the peace process,” Palestinian peace negotiator Saeb Erekat said.

The United States had hoped for at least a framework deal on Palestinian statehood before President George W. Bush leaves office in January.

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Negotiations have so far shown few signs of progress -- Israeli settlement expansion and the future of Jerusalem are key stumbling blocks. And with Israel’s political scene in turmoil, there appeared to be little chance of an agreement.

Livni told Israel’s Channel 10 television station she could not rule out future talks about dividing Jerusalem, a city Israel regards as its capital and which Palestinians want as capital of a possible state.

When asked about why she refused Shas’s demands to rule out negotiations on Jerusalem, Livni said she could not make the guarantee because “Israel is committed to a peace process about several issues.”

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Livni also said she favored a “united” Jerusalem as Israel’s capital, using a noncommittal catch phrase that avoids saying whether the city could be shared.

Shas, a major force among Israeli Jews of North African and Middle Eastern descent, bills itself as a party of Israel’s poor and has long been a maker and breaker of coalition governments.

Livni’s refusal to bend to budgetary demands suggests she intends to fight an election campaign that portrays her as a woman of principle to an electorate disillusioned with coalition haggling and suspicions of wrongdoing at the top.

“We have reached the point where I think the public is truly fed up with politicking,” Livni said at Peres’ official residence.