Israeli Prime Minister Ariel Sharon was set on a collision course Monday with his most loyal coalition partner, the Shinui Party (search), raising prospects of early elections that could postpone Israel's withdrawal from the Gaza Strip.

A local Hamas (search) leader indicated the militant group would hold off on attacks as long as Israel scales back military operations.

Sharon has been walking a political tightrope since losing his parliamentary majority several months ago, with hard-liners bolting over his plan to withdraw from the Gaza Strip and four West Bank settlements in 2005.

Sharon's coalition problems heightened this week because he needs to get his 2005 state budget approved in parliament. The opposition Labor Party — which provided a parliamentary safety net to Sharon because it supported his plan of "disengagement" from the Palestinians — announced last week it would not vote for the 2005 budget because of cuts in social spending.

In trying to cobble together the necessary parliamentary majority, Sharon agreed Sunday to transfer $98 million to two religious parties in exchange for their support for the budget.

The move enraged the secular-rights party Shinui, Sharon's most loyal and largest coalition partner. Shinui leader Yosef Lapid (search) said his party would vote against the budget, depriving Sharon of a parliamentary majority.

Sharon responded with a threat to fire any ministers opposing the spending plan. Shinui then would be forced out of the coalition, leaving Sharon with the support of only 40 legislators in the 120-member parliament.

Addressing legislators of his Likud Party (search) on Monday, Sharon made it clear he would not back down and praised the agreement with the religious parties.

If the budget does not pass by March 31, Sharon's government automatically would fall and elections would have to be held within three months. The Gaza pullout is set to begin next July.

Elections currently are scheduled for November 2006.

Lapid said Monday that Shinui would not be deterred from voting against the budget.

"Sharon is cutting off the branch his government is sitting on, and if he does this then there will be elections in the very near future," he told Israel's Army Radio.

Officials close to Sharon said he wants to bring the ultra-Orthodox Shas Party (search) and Labor into his government, a coalition that would be acceptable to most members of Likud.

In other developments Monday, a senior West Bank leader of Hamas, Hassan Yousef, suggested the Islamic militant group would hold off on attacks as long as Israel scales back military operations.

Hamas, which opposes the existence of the Jewish state, has killed hundreds of Israelis in attacks during the past four years.

There has been a lull in fighting since Yasser Arafat's death Nov. 11. Militant groups have not formally declared they are halting attacks but have signaled to interim Palestinian leader Mahmoud Abbas that they would not try to cause disruptions in the run-up to Jan. 9 Palestinian elections.

An adviser to Sharon, Raanan Gissin, said Israel has cut back its military operations in an attempt to make the most of the opportunity presented by Arafat's death. He said Arafat's death made it possible for the sides to begin implementing the long-stalled U.S.-backed "road map" peace plan, which envisions the formation of a Palestinian state by next year.

Also Monday, Israeli security officials confirmed that Defense Minister Shaul Mofaz has approved a revised route for the West Bank separation barrier after the Supreme Court ordered changes to reduce hardship for Palestinians.

The Haaretz daily newspaper reported that Israel will seize half as much land — 100,000 acres — as originally planned. The revised route still requires Cabinet approval.