Reporting from Jerusalem -- Avigdor Lieberman, whose ultranationalist rhetoric has raised alarm among Arabs and international concern, took a major step Monday toward becoming foreign minister in Israel's next government.

His appointment, part of a pact between his right-wing party and that of Prime Minister-designate Benjamin Netanyahu, is not final. The deal leaves an opening for the current foreign minister, Tzipi Livni, to stay in that post if her centrist Kadima party agrees to join the coalition.

But that possibility appeared remote.

If confirmed, Lieberman's ascent to Israel's top diplomatic post could complicate its ties with other countries. He is viewed by many abroad as a xenophobe, having risen to prominence by advocating loyalty oaths for Israel's Arab citizens and a redrawing of borders to exclude some Arab communities from the country.

Although neither proposal is likely to be implemented, Lieberman's appointment would solidify Israel's shift to the right and away from commitment to achieving a peace accord that would give the Palestinians an independent state.

Javier Solana, the European Union's foreign policy chief, signaled his concern Monday.

"We will be ready to do business as usual, normally, with a government in Israel that is prepared to continue talking and working for a two-state solution," he told reporters in Brussels. "If that is not the case, the situation would be different."

Riad Malki, foreign minister of the West Bank-based Palestinian Authority, called the emerging Israeli government "anti-peace." Ahmed Tibi, an Israeli Arab member of parliament, called for an international boycott of Lieberman. "No minister should meet him," he said, "especially no Arab minister."

Netanyahu, leader of the conservative Likud party, has been trying for nearly a month to form a majority coalition from the parliament elected Feb. 10 in which no party won a majority. He is seeking a broad-based government that would include Livni's party.

Livni, who had hoped to become prime minister herself, has rebuffed him several times, saying she would join only if Netanyahu agreed to continue pursuing the statehood negotiations that she began last year in a U.S.-brokered peace process with the Palestinian Authority.

Divisions on that issue persist, Livni said Monday, despite a new effort to recruit her. Netanyahu has said he wants to refocus the peace talks on efforts to bolster the Palestinian economy, leaving the issues of borders, sovereignty, the status of refugees and control of Jerusalem to a later date.

"Serving as a fig leaf in order to strengthen a policy other than ours is certainly not the right thing to do," Livni told members of her party.

But a Netanyahu spokeswoman, Dina Libster, said a deal with Livni was still possible.

Netanyahu has until April 2 to form a government. Monday's agreement was the first he has initialed toward that end. Lieberman's Israel Is Our Home party would control five ministries, including foreign affairs.

In return, Lieberman dropped his demand to institute civil marriage in Israel, agreeing instead to give a government committee 15 months to study the issue. The deal paved the way for Shas, an ultra-Orthodox party that favors maintaining rabbinical control of marriages, to join the coalition.

Lieberman also backed down on his proposed loyalty oath. The agreement with Netanyahu's party said courts should be given power to withdraw government assistance from anyone found to have engaged in terrorism or espionage.

The coalition is expected to include several smaller right-wing parties that along with Shas and Israel Is Our Home could give Netanyahu command of 65 of the Israeli parliament's 120 seats.

As a new government began to take shape, Prime Minister Ehud Olmert was spending his final days in office working intensively through Egyptian mediators for the release of Israeli Staff Sgt. Gilad Shalit, who has been held for nearly 1,000 days by Palestinian militants since his capture near the Gaza Strip.

Two Israeli envoys returned from Cairo without an agreement Monday following indirect negotiations with the militant group Hamas, which seeks the release of hundreds of Palestinian prisoners in exchange for the 22-year-old soldier.

After Olmert met with the envoys, his office issued a statement saying Hamas had hardened its position by retracting previous understandings and raising new demands. He called a special Cabinet meeting today to weigh Israel's next step.