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Army radio also said the government would commit to working against unauthorised Jewish settlements in the West Bank. With Labour's support, Mr Netanyahu would have 66 seats in the 120-member Knesset, or parliament.

Israel's centre-left Labour party has narrowly voted to join a coalition government led by Benjamin Netanyahu of the right-wing Likud.

The far right Yisrael Beiteinu and ultra-Orthodox Jewish party Shas have already agreed to join the coalition. The centrist Kadima has so far refused to join over policy differences.

If he won support from all of Labour's MPs, he would command 66 seats in the 120-member Knesset, or parliament.

He wants to have Labour on board in order to calm widespread fears that a narrowly right-wing Israeli government could jeopardise renewed peace efforts with the Palestinians.

About half of the party's 13 lawmakers objected to Mr Netanyahu because of his long-standing opposition to peace efforts which Labour has backed, Haaretz newspaper reports. Mr Netanyahu has refused to sign up to the two-state formula which has underpinned more than 15 years of Israeli-Palestinian peace efforts.

Some delegates chanted "disgrace" as the result came in. Mr Barak is defence minister in the current government and would retain the post in the next government, reports suggest.

Under the draft coalition agreement, Labour would get five cabinet posts and the government would commit to continuing negotiations with the Palestinians and to respecting previous deals made with them. Army radio said the government would commit to working against unauthorised Jewish settlements in the West Bank.

A Likud member of the Knesset, Yuli-Yoel Edelstein, said there was general agreement between Likud and Labour on the main international challenges facing the incoming government.

"Because in practical terms, I don't think that either side really believes that it's possible to reach an agreement with the present Palestinian leadership in the near future."

Mr Lieberman's party also wants to introduce a loyalty pledge, which would demand that Israeli-Arabs swear allegiance to Israel as a "Jewish, Zionist and democratic" state, before they can be issued with their ID papers.

His party would also have four other ministers in the cabinet, including national security minister, as well as the post of deputy foreign minister.

Lieberman, 50, a Russian-speaking immigrant born in Moldova, resigned from the government in January last year in protest at the restarting of peace talks with the Palestinians, saying: "Negotiations on the basis of land for peace are a critical mistake ... and will destroy us."He is an unashamed hardliner who campaigned on the promise of a new law aimed at the country's Arab minority which would require Israelis to swear an oath of loyalty to Israel as a Jewish state or lose their citizenship.He also advocates carving out part of the Galilee that is home to Arab Israeli villages and handing it over to Palestinian control, stripping the residents of their Israeli citizenship. Those policies proved popular enough for him to come third at the polls, but the oath of loyalty is thought unlikely to come into law.

The agreement between Netanyahu and Lieberman gave a taste of the policies that would follow. "Toppling the Hamas government in the Gaza Strip will be an Israeli strategic goal," the agreement said. The new government would act "with determination" to stop rocket fire by militants in Gaza.It also said: "The government will not conduct political negotiations with terrorist organisations or terrorist elements."Settlements are likely to continue to grow – Lieberman himself lives in Nokdim, a settlement south-east of Bethlehem in the occupied West Bank.

Netanyahu has said the current peace talks with the Palestinians will not succeed and that he would rather pursue an "economic peace", by which he means financial investment in the occupied West Bank.

He also intends to make Iran the centre of his foreign policy. The agreement said: "Israel will make every effort, especially with regard to the international community, to prevent the nuclear armament of Iran, while emphasising that a nuclear Iran, representing a danger to Israel, countries in the region and the entire free world, is unacceptable."

Riad Malki, the Palestinian foreign minister, said: "We have to declare that sadly there is no partner on the Israeli side to negotiate with."

Lieberman, an immigrant and former nightclub bouncer from former Soviet Moldova, does not talk about Palestinian independence. Instead, his party's vision on the two-state solution states: "Israel needs to explain that the demand for a Palestinian state and the refugees' right of return is a cover for radical Islam's attempt to destroy the State of Israel." Lieberman was a member of the current Israeli government, but walked out in January last year as soon as peace talks restarted with the Palestinians.

Britain, in particular, is critical of Israel's settlements in east Jerusalem and the West Bank, all of which are illegal under international law. But that cause might be harder to argue in future given that the almost 500,000 Israeli settlers include Lieberman and his family, who live in Nokdim, deep inside the West Bank.

Lieberman's main target has been his country's own Arab minority, who make up a fifth of the population, and of whom he has said: "Israel is under a dual terrorist attack, from within and from without. And terrorism from within is always more dangerous than terrorism from without."

It was this campaign, particularly his call for Arabs to swear an oath of loyalty to Israel as a Jewish state, that won him so much support in the elections. He has even suggested that some elected Arab MPs in the Israeli parliament should be tried for treason and then executed.He also appeals to more secular Israelis, arguing in favour of civil marriages, as well as advocating a more presidential style of government.

This would also make it difficult to reach agreement between Israel and the Palestinians on the question of permanent borders.