Secretary of State Condoleezza Rice left Israel on Monday having failed to persuade leaders here to halt settlement construction on occupied Palestinian land. But the setback for Rice was a victory for Rabbi Ovadia Yossef, the spiritual leader of the ultra-Orthodox Shas party.

Within hours of Rice's departure, Israeli Prime Minister Ehud Olmert was on the phone with Yossef to tell him that plans for building 800 new homes in the West Bank settlement of Betar Illit had been approved, according to two Shas officials, just as Shas had requested.

The episode illustrates the extent of the small party's influence over U.S. efforts to negotiate a peace treaty between Israel and the Palestinian Authority.

Shas is the linchpin of Olmert's fragile coalition government. Party leaders have threatened to withdraw their support for Olmert if he freezes settlement construction or if the issue of Jerusalem even comes up in the negotiations.

The threat has put greater pressure on a process that is already faltering. Israeli political analysts say Olmert may face a choice later this year: He can have a peace deal or he can hold his coalition together, but not both.

"Olmert needs Shas," said Gabriel Sheffer, a political science professor at the Hebrew University of Jerusalem. "So he is giving them almost anything they want."

What the party has wanted lately is money for its privately run -- but largely publicly funded -- religious education system and new homes for ultra-Orthodox families in Israeli settlements.

After Olmert informed Yossef that the Betar Illit construction could go ahead, Shas members on Monday night helped Olmert fend off a no-confidence motion in the Israeli parliament, despite earlier hints that they might abstain. A spokesman for Olmert, Mark Regev, confirmed that the prime minister had talked with Yossef on Monday afternoon. He would not disclose the content of the conversation or comment on Shas's account.

The party represents Sephardic Jews, mostly from Arab countries, who have long felt marginalized in Israel by the dominant Ashkenazim, who came from Europe.

Although its leaders are ultra-Orthodox, the party has gained favor among less religious Sephardim by offering social services, including an extensive school system, in poorer areas underserved by the state. Much of its funding, however, has been taxpayer money earmarked for Shas's programs as the price of the party's participation in governing coalitions.

The party has also won popular backing by forcing the government to approve affordable-housing projects that are in the West Bank but within an easy drive of Jerusalem, such as Betar Illit.

When Olmert's government announced in March that it would allow construction of 750 housing units in the West Bank settlement of Givat Zeev to resume, State Department officials described the decision as "unhelpful," and Rice raised concerns about it in a meeting with Israeli Foreign Minister Tzipi Livni.

But Shas hailed the new construction as a major triumph. "The prime minister accepted our demands," said Yakov Margi, leader of Shas's 12-member delegation in the Knesset, Israel's parliament.

Olmert's coalition government now has 67 members in the 120-member Knesset. Shas's influence underscores the importance of smaller parties in Israel, which has a system of proportional representation that makes it virtually impossible for any single party to gain a majority of Knesset seats.

Because Shas has much to gain from such a crucial role in the coalition, some observers dismiss its threats to bolt as mere bluster. But Margi said Shas's line in the sand is Jerusalem. United under Israeli control for the past 41 years, the city cannot be divided again, he said. "Jerusalem is the heart of the Jewish people," Margi said. "I don't know a Jew with a brain who talks about dividing Jerusalem."

Shas made its threat to bolt from the government in November, on the eve of the Annapolis conference launching the most recent U.S. peace efforts, and has repeated it since. The Annapolis process is intended to resolve the core issues dividing Israel and the Palestinians, including Jerusalem. The Palestinians, who want East Jerusalem as their capital, have said that the city's future is on the table.

Margi said it will be up to Yossef and his council of rabbis to determine when Olmert has crossed the line and whether Shas should then pull out. "He is the decider," Margi said.

Relatively dovish during the government of Labor Prime Minister Yitzhak Rabin, the party became more hawkish after the hope of the 1993 Oslo agreements soured. But other ultra-Orthodox groups and some secular parties don't consider Shas hawkish enough and blame the party for giving Olmert room to pursue a peace process that they see as fundamentally misguided.

"They are making a big mistake," said Binyamin Elon, chairman of the National Union party, which does not support the creation of a separate Palestinian state as proposed under the Annapolis process.

Israel's left, meanwhile, insists that Olmert could survive without Shas and that the party's threat to quit is just a cover for the lack of progress in the negotiations.

"Shas is a political excuse for Olmert not to take risks," said Chaim Oron, the new leader of the dovish Meretz party. Meretz is part of the opposition, but Oron said his party would support Olmert if it meant achieving a peace deal.

Still, Meretz has only five seats, compared with Shas's 12, so that would not be enough for a majority. In any case, Olmert seems in no mood to endanger his coalition at a time when opinion polls show he would lose badly in new elections to Likud leader Binyamin Netanyahu, a sharp critic of Annapolis who advocates greater military measures to counter threats of Palestinian violence.

"The prime minister sees Shas as an important partner in his coalition. And he thinks retaining a stable coalition at this time is very important. The last thing Israel needs right now is political instability," said Regev, Olmert's spokesman. "The prime minister will do everything in his power to both maintain a stable coalition and move forward with the peace process."

But Ami Ayalon, a minister from the Labor Party, said those goals might prove incompatible. "The faster he goes on diplomacy in order to empower his Palestinian partner, the sooner he will lose his coalition," Ayalon said. "He will have to take risks with his coalition in order to achieve something."