Israeli Foreign Minister Tzipi Livni on Sunday gave up trying to form a coalition government, paving the way for new elections in early 2009. Palestinian officials worried that her decision could also mean the end of the fragile Israeli-Palestinian peace process, which resumed just under a year ago and had been a priority of the Bush administration.

Livni met with President Shimon Peres on Sunday and told him that despite five weeks of consultations, she was unable to put together a government. Peres can either ask another parliament member to try to cobble together a majority coalition, or he can announce that Israel will hold general elections. Analysts agreed that the latter is the more likely scenario, and Livni urged Peres to call elections as quickly as possible.

Peres had tasked Livni with forming a new government last month, after she won a primary to lead the centrist Kadima party. The former leader of Kadima, Ehud Olmert, resigned as prime minister amid a corruption investigation but remains head of a caretaker government until a new coalition can be formed.

If Israel holds elections, most polls forecast a highly competitive race between Livni and former prime minister Binyamin Netanyahu, leader of the right-wing Likud party and a sharp critic of peace talks with the Palestinians. Livni has been a proponent of those talks.

In a statement to the news media after her meeting with Peres, Livni, wearing a somber black pantsuit and looking grim, said she was not willing to sell out her principles to form a government.

"I was willing to pay a price to form a government, but I was never willing to risk the political and economic future of Israel," she said, her comments carried live on Israeli TV and radio. "But in the past few days it has become clear to me that the current system has led future coalition partners to make unreasonable economic and political demands. . . . If someone is willing to sell out his principles for the job, he is not worthy of it."

The statement was a sharp attack on the ultra-Orthodox Shas party, which in exchange for joining the coalition had been demanding hundreds of millions of dollars in government assistance for its constituents, as well as a promise that Livni would not make any concessions on the future of Jerusalem. Palestinians say East Jerusalem, which Israel captured in 1967 and later annexed, must be the capital of a future Palestinian state.

Shas, with its 12 parliament members, had been part of the government led by Olmert, and had been expected to join a new Livni-led coalition. But on Friday, Shas's 88-year-old spiritual leader, Rabbi Ovadia Yosef, decided that the party would not join the coalition unless its demands were met.

"We were not willing to divide Jerusalem," Shas political leader Eli Yishai told Israel TV. "Jerusalem is not for sale."

Israeli analysts said Livni's inability to form a government could make her election campaign more difficult.

"Going to elections was her last choice. But she realized she couldn't put together a government," said Joseph Alpher, the former head of the Jaffee Center for Strategic Studies at Tel Aviv University. "This is going to hurt her image. It would have been much better for her if she could have gone into the elections with even a few months as prime minister."

Palestinians said they worried that the Israeli election campaign would put the peace process on hold. Following a seven-year hiatus, Israeli-Palestinian negotiations resumed last fall with the Annapolis peace conference.

Livni headed Israel's negotiating team, and in the past few months, both sides had reported progress. Security cooperation has increased, and 550 U.S.-trained Palestinian police deployed in Hebron this weekend, following deployments in Nablus and Jenin.

Israeli and Palestinian negotiators have also discussed the "core issues" in the conflict, such as final borders, Jewish settlements, the return of Palestinian refugees and the future of Jerusalem.

President Bush had called for at least an outline of an agreement by the end of the year, but both sides had said that was not likely. Olmert had been scheduled to meet Palestinian Authority President Mahmoud Abbas on Sunday, but that meeting has now been postponed.

"We don't want to interfere in Israel's domestic concerns, but early elections means the peace process will be put on hold," said senior Palestinian negotiator Saeb Erekat. "Previous experience has taught us that before elections in Israel, everyone is focused on the elections and not on the peace process."

Some dovish activists fear that if Netanyahu wins the election, the peace process could be suspended indefinitely.

"This is a disaster for the peace process," said Gershon Baskin, the co-chief executive of a joint Israeli-Palestinian think tank. "If Netanyahu wins, I think we should begin preparing for another round of violence. Livni should have given Shas whatever it asked for and gone ahead with the peace process."

There is little enthusiasm among Israelis for a new round of expensive elections. Estimates are that elections will cost about $150 million. Even before Sunday's events, Israelis had been growing disgusted with their fractious political system, which encourages small parties to make large demands in exchange for support.

If elections are called as expected, Livni will face a challenge from Netanyahu and Labor Party leader Ehud Barak, also a former prime minister. Recent polls have shown Netanyahu and Livni leading, well ahead of Barak.

Alpher said the results of the U.S. election could play a role in the Israeli election.

"The Israeli public wants a prime minister who gets along with the U.S. president," he said. "If Obama wins, and goes ahead with his plan to open a dialogue with Iran and Syria, that could help Livni. If McCain wins, that might help Netanyahu."

Livni had hoped to be the first female Israeli prime minister in more than three decades, and only the second in the country's history. In contrast to Olmert, she projected herself as being above corruption. A lawyer, she began her career in the Israeli foreign intelligence service and entered politics a decade ago.