(Updates on possible dates, paragraphs 2,11, adds reaction)

By Allyn Fisher-Ilan

JERUSALEM, Oct 25 (Reuters) - Israeli Foreign Minister Tzipi Livni called off her efforts to form a new governing coalition on Saturday and will recommend holding an early parliamentary election after a key party backed out of talks, officials said.

The decision by Livni, the designated successor to scandal-hit outgoing Prime Minister Ehud Olmert, means an election is likely in late January or February. The next parliamentary poll had been scheduled for 2010.

An election could kill off already slim chances of meeting Washington's objective of a peace deal between Israel and the Palestinians before President George W. Bush leaves office in January.

Polls suggest Israel's right-wing opposition under former prime minister Benjamin Netanyahu , which has been sceptical of Olmert's peacemaking moves, would win any vote now.

Livni, bidding to be Israel's first woman leader since Golda Meir in the 1970s, must count on a major turnaround in support for the centrist Kadima party she has inherited from Olmert if she is to realise her ambition through the ballot box.

Her initial failure gives Olmert several more months in office. But hamstrung by the threat of being indicted for corruption and by his limited role as caretaker, he lacks authority to bind his successors into an agreement to establish a state for the Palestinians, as Bush has urged him to do over this past year.

Livni huddled with advisers for hours after the religious Shas party rejected a coalition pact on Friday. It objected to sharing control of Jerusalem with the Palestinians and to Livni's offers on benefits for low-income Israelis, from whom Shas draws most of its support.

A political source said Livni "decided to opt for elections". She will meet President Shimon Peres on Sunday and give him her recommendation: "We couldn't give in to political blackmail and we should hold elections," the source said.

"You cannot mortgage Israel's future for a coalition," Army Radio quoted Livni as saying of Shas's welfare demands.

Though an election may mean upheaval, politicians across Israel's multi-party system spoke out in favour of a vote. It would come three years after Olmert won a ballot called when Kadima founder Ariel Sharon suffered a stroke that plunged him into a coma.

OPPOSITION HOPES

"Israel needs an election to get rid of the failed government," said rightist lawmaker Aryeh Eldad, a critic of Olmert's U.S.-sponsored peace talks with the Palestinians.

The possibility of an 11th-hour deal to secure a workable parliamentary majority for a Livni cabinet remains. She has the support of the left-wing Labour party, led by Ehud Barak who is defence minister in the outgoing coalition, as well as some smaller groups. But Livni aides have said she does not favour trying to run the country without a substantial majority.

Peres could in theory invite someone else to try to form a government. But former premier Netanyahu has made clear his right-wing Likud wants an election, from which polls show it would benefit. And Barak, also a former prime minister, cannot head a new government as he lacks a parliamentary seat.

There is some dispute among Israeli legal experts about exactly when an election might be held, not least because there is more than one mechanism by which a vote can be triggered.

One such expert, Moshe Negbi, said an election must be within 90 days of Peres notifying parliament of Livni's failure to form a government. Livni had set an earlier deadline for coalition talks than the Nov. 3 she was granted under the law, in a failed bid to put pressure on potential partners to sign an agreement.

Peres asked Livni, who has been Olmert's chief negotiator with the Palestinians, to form a government after she was elected leader of Kadima in September and Olmert formally resigned after being targeted in a corruption and fraud inquiry.

Likud lawmaker Gideon Saar said Livni's failure to persuade others to join her raised questions about her leadership: "If she fails at this, how can she negotiate about the complex and fateful issues for the country's future with the Palestinians?" (Writing by Allyn Fisher-Ilan; Editing by Alastair Macdonald and Mark Trevelyan)

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