(Recasts after parliament vote approves coalition partner)

By Jeffrey Heller

JERUSALEM, Oct 30 (Reuters) - A far-right faction opposed to relinquishing occupied land joined Israeli Prime Minister Ehud Olmert's governing coalition on Monday, a partnership likely to complicate any peace efforts with the Palestinians.

Israel's parliament ratified Yisrael Beitenu's membership in the government. The party is led by Avigdor Lieberman, a firebrand settler who has become a figure of hate for Israel's Arab minority.

Lieberman and his party advocate annexation of parts of the occupied West Bank and jurisdictional transfer of several Arab towns in Israel to the Palestinian Authority.

All but one cabinet member voted in favour of Yisrael Beitenu's entry, Israel Radio said, after Olmert's main coalition partner, the left-leaning Labour party led by Defence Minister Amir Peretz, decided on Sunday to remain in the government despite its differences with Lieberman.

The 120-member parliament approved the expanded government on Monday night with 61 lawmakers voting in favour and 38 opposing it.

The minister who voted in cabinet against Lieberman and his party's inclusion, Ofir Pines-Paz of the Labour party, announced his resignation from the cabinet in a televised news conference.

He also said he would stand for the leadership of his party when Labour holds a ballot sometime next year.

"I cannot give up my conscience," said Pines-Paz, who holds the science and technology, culture and sport portfolios.

He said Lieberman and other Yisrael Beitenu party members were "tainted through their racist and anti-democratic pronouncements." His departure will take effect 48 hours after he delivers his resignation letter to the cabinet.

Winning Lieberman's support while keeping Labour at his side marked a reversal of fortunes for Olmert, whose popularity, along with Peretz's, has plummeted in opinion polls since last summer's indecisive war against Lebanese Hezbollah guerrillas.

Yisrael Beitenu's 11 lawmakers will give Olmert's coalition control of 78 seats in parliament -- a particularly strong majority in Israeli politics.

Speaking after the cabinet vote, Olmert said the government's guidelines, which include seeking peace based on the creation of a Palestinian state alongside a secure Israel, would go unchanged.

"I think it is vital we act in the diplomatic field ... this includes, first and foremost, the Palestinians," he said in broadcast remarks.

"DANGEROUS CREATURE"

With prospects poor for a renewal of Middle East peace efforts any time soon, there appear to be few issues ahead that could divide the new Israeli alliance.

Olmert has wide backing at home, and from the United States, for his refusal to engage in any dialogue with a Palestinian government led by Hamas until the Islamist group recognises Israel and existing interim peace deals and renounces violence.

Nabil Shaath, a senior member of Palestinian President Mahmoud Abbas's Fatah party, called Lieberman "a dangerous creature" and said his inclusion in the cabinet was "an ugly symbol of the direction this Israeli government is taking".

Shifting Israel's public focus towards fears of a nuclear Iran, Olmert announced after the 34-day Lebanon war ended in August that the "realignment" plan on which his centrist Kadima party won election in March was no longer a pressing issue.

The proposal called for dismantling dozens of Jewish settlements in the West Bank, while strengthening others in the absence of peacemaking. Taking it off the agenda helped pave the way for Lieberman to join the coalition.

Olmert has given Lieberman, who will be one of his deputy prime ministers, special responsibility for strategic issues, Israeli shorthand for Iran's nuclear programme which Israel and the West fear Tehran will use to build nuclear weapons.

The Islamic Republic, whose president has called for Israel's destruction, says it is enriching uranium only to generate electricity.

Lieberman, a 48-year-old immigrant from the former Soviet Union who once worked as a night club bouncer, has served twice as a cabinet minister. (Additional reporting by Ori Lewis and Mohammed Assadi in Ramallah)

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