* Netanyahu won't give ultranationalist defence post

* Lieberman's party signals flexibility

By Dan Williams

JERUSALEM, March 3 (Reuters) - Prime Minister-designate Benjamin Netanyahu has ruled out giving Israel's defence portfolio to a leading ultranationalist politician should they form a coalition government, political sources said on Tuesday.

The far-right Yisrael Beiteinu party of Avigdor Lieberman took the third-largest number of parliament seats in a Feb. 10 election, making him prospective junior partner to Netanyahu's right-wing Likud, with leverage to demand top cabinet slots. Lieberman, a Moldovan-born ex-nightclub bouncer turned bureaucrat, has said he would like to be defence minister. That prospect raised eyebrows in Israel and abroad given his hawkish talk on issues like Iran's nuclear programme.

Asked what the chances were of Netanyahu offering Lieberman the defence portfolio, a senior Likud official said "zero".

Netanyahu, a former premier, was aware of the range of challenges to Israel's national security and wanted a "smooth transition" for the Defence Ministry, another official said.

Irena Etinger, a Yisrael Beiteinu spokeswoman, said coalition talks with Likud were still in the preliminary stages but signalled flexibility on the part of Lieberman:

"He has said he wants the defence portfolio, but he has also said cabinet positions are not a dealbreaker. What's really important is that we agree on basic policy lines."

Yisrael Beiteinu, which has a large constituency among secular immigrants from the former Soviet Union, has sparred with Shas, a powerful conservative party run by rabbis and also wooed by Likud, over Israeli laws restricting marriage and other social rites in accordance with Orthodox Jewish standards.

BIBI WANTS BARAK

Likud sources said Netanyahu wanted the current defence minister, Ehud Barak of the centre-left Labour party, to stay on. But Barak is hobbled by the demand of many Labourites to shun an incoming government that would appear to have little interest in U.S.-sponsored peacemaking with the Palestinians.

Barak has voiced willingness to go to the opposition, though that would mean the 66-year-old former prime minister accepting the relative obscurity of the back benches. Foreign Minister Tzipi Livni of the ruling Kadima party is the likely next opposition leader as her party took more votes in the election.

"Ehud Barak very, very, very, very much wants to sit in a coalition with Bibi (Netanyahu), Shas, and Yisrael Beiteinu," Labour lawmaker Shelly Yacimovich told Israel's Army Radio.

But she hinted at a Labour mutiny should Barak try to push for an alliance with Likud: "We are not a party in which Barak chose his people ... On the contrary, we elected him."

Bereft of Barak, Netanyahu would be likely to give the Defence Ministry to Moshe Yaalon, another retired general who recently joined Likud's ranks, party sources said.

Also in the running is Dan Meridor, a Likud stalwart who once served as cabinet minister in charge of the intelligence services and audited Israel's long-term strategic planning.

The last time Israel had a defence minister without a military pedigree was in 2006, when Labour leader Amir Peretz took the post as part of a coalition deal with Prime Minister Ehud Olmert's Kadima.

The setbacks of the Lebanon war, that summer, were widely blamed on Peretz's inexperience. He was replaced by Barak.

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