Ariel Sharon tried Thursday to rebuild a government left in shambles by the departure of the center-left Labor Party, and the Israeli leader was expected to court ultranationalists opposed to a peace deal with the Palestinians.

The political instability in Israel bodes ill for a new U.S.-backed peace plan, and Palestinian officials say they fear a government stacked with hardliners will adopt even tougher policies in the West Bank and Gaza Strip.

After Labor quit Wednesday because of a dispute over funding for Jewish settlements in the 2003 state budget, Sharon was left with a minority government that controls only 55 seats in the 120-member parliament.

The opposition is pressing for new elections, but it may not muster 61 legislators needed to topple the government, but it will become increasingly difficult for Sharon to govern.

Despite the unstable situation, Sharon was quoted as saying Thursday he would not seek elections ahead of the scheduled date — November 2003.

"I plan to make every effort to establish an alternative government," Sharon told the Yediot Ahronot newspaper. "I have no intention of ... initiating early elections."

Sharon offered the defense portfolio vacated by Labor leader Binyamin Ben-Eliezer to former army chief Shaul Mofaz, who led large-scale offensives against Palestinian militants and advocated the ouster of Palestinian leader Yasser Arafat. Mofaz left the army in July when his four-year term was up.

A Sharon aide, Arnon Perlman, said Thursday that Mofaz has accepted the defense post.

Arafat suggested the Mofaz appointment would lead to tougher Israeli measures against the Palestinians.

"Mofaz from one side, [current army chief Moshe] Yaalon from the other side, Sharon above them ... imagine how the area is going to be," Arafat said in an interview with Associated Press Television News.

"The Israeli people must think of these changes seriously," he said.

The main target of Sharon's coalition building efforts is National Union-Israel Beitenu, a far-right grouping of seven legislators who oppose any negotiations with the Palestinians and advocate settlement expansion in the West Bank and Gaza.

The Israeli daily Maariv reported that Sharon has offered the faction's leader, Avigdor Lieberman, the post of foreign or finance minister. However, the report could not be confirmed independently. A legislator from the National Union, Benny Elon, said he was unaware of such an offer.

Lieberman is a close ally of Sharon's key rival for Likud Party leadership, former Prime Minister Benjamin Netanyahu, and appeared in no hurry to join the government. Lieberman was quoted as saying before the breakup of the coalition that he prefers early elections.

Elon said the final decision was up to the faction. Elon said National Union legislators would meet with Sharon envoys in the coming days. He said Sharon should be urged to adopt a more hard-line government platform, which he said would be more in line with the prime minister's right-wing convictions.

"We want to see if he [Sharon] is willing now to use this year to have a clear policy," including harsher measures in the West Bank, Elon told AP.

Sharon asked outgoing Foreign Minister Shimon Peres to stay on, said Labor legislator Colette Avital. But Peres advisers said he would not break with his party. Yediot said Sharon wanted Peres, a Nobel Peace Prize laureate, to serve as a special envoy and represent Israel abroad.

Serving as a counterweight to Sharon's hawkish views, Peres had helped deflect some of the international criticism of Israel.

Sharon's next test will come Monday when parliament votes on a number of no-confidence motions. In the same session, the Mofaz appointment reportedly will be submitted for approval.

Ben-Eliezer, meanwhile, came under intense criticism Thursday for having broken up the 20-month-old government over Labor's demand that $145 million in allocations to Jewish settlements be cut from the 2003 budget.

Critics said Ben-Eliezer's main motive was to improve his standing in his party ahead of primaries on Nov. 19. He trails two more dovish challengers, Amram Mitzna and Haim Ramon, and leaving the government over a settlement dispute could bring him votes.

Addressing parliament after his resignation, Ben-Eliezer laid out his platform for opposing Sharon, saying the government had no plans for peace with the Palestinians and — with the economy badly hurt by the two years of fighting — had abandoned Israeli's poor.

"Sharon's national unity government fell apart because he preferred the settlements to the development towns, the settlements to the students, the settlements to the hungry," Ben-Eliezer said Thursday.

Arafat adviser Nabil Abu Rdeneh said Israel's government has not been a partner for peace, even with Labor in it, and that a narrow coalition would even be worse.

"The behavior of such a government will reflect negatively on the Middle East, and the United States should also be worried about dealing with a right-wing government in Israel because it is going to endanger the American interests in the region," Abu Rdeneh said.

The upheaval spells trouble for U.S. efforts to win support for a three-phase peace plan envisioning a provisional Palestinian state by 2003. Elections would mean a delay of many months, and Sharon's far-right partners in a narrow coalition likely would object to many of that plan's provisions, such as a settlement freeze and a significant Israeli troop pullback.