The agreement was signed by MPs from both sides following a marathon 19-hour negotiating session, and would bring Labour's 19-member parliamentary delegation into an alliance with Kadima's 29-member bloc.

The alliance constitutes a major step towards forming a new governing coalition in the 120-member assembly but is not in itself sufficient to allow Livni to become the country's second female premier after Golda Meir.

Israeli public radio reported that the two sides must still agree on which government posts will go to the centre-left Labour party.

Kadima's chief negotiator, Tsahi Hanegbi, told Channel 2 television that hammering out the accord had been hard going.

"It was not easy reaching this agreement," Hanegbi said, adding that it was concluded with the idea that it would operate for the next two years.

Following Tuesday's Sukkot holiday, Kadima negotiators will meet with leaders from the ultra-Orthodox Shas party, which has 12 MPs, the leftist Meretz party, which has five, and the Pensioners party, which has three.

Hanegbi said that Kadima would have to thrash out a similar accord with Shas, "otherwise there will be no government."

Livni, 50, was formally asked by President Shimon Peres on September 22 to form a new government, after she took over as Kadima chairman from Prime Minister Ehud Olmert, who stepped down as police recommended he be indicted over graft allegations.

She has since held negotiations with Labour and several smaller parties in a bid to gain the support she needs to form a new coalition government and avert snap elections that could bring the right-wing Likud party to power.

Bringing Defence Minister Ehud Barak's Labour party and its 19 MPs into the coalition would put Livni well on her way to forming a new government but she would need to recruit at least two smaller parties to do so.

The ultra-Orthodox Shas, a crucial member of Olmert's coalition, has demanded increased child subsidies and a promise not to negotiate over Jerusalem with the Palestinians.

Livni, who as Israel's top diplomat has led US-backed negotiations with the Palestinians relaunched last November, has vowed to continue the process, which is aimed at securing a full peace agreement by the end of 2008.

The Palestinians have demanded mostly Arab east Jerusalem -- occupied and annexed by Israel in the 1967 war -- as the capital of their future state, while Israel considers the entire city its own "eternal, undivided" capital.

Under the draft agreement Barak would gain greater influence over cabinet decisions and negotiations with the Palestinians and Syria, the Ynet News service reported.

"The summary draft, according to which cabinet decisions will not be made without the support and ratification of Barak, is dramatic," the news site quoted a Barak associate as saying.

Channel 2 said the agreement, which runs to 38 paragraphs, envisages in particular a budgetary expansion for pensioners amounting to 850 million shekels (229 million dollars) over the three next years.

Ehud Barak will be appointed deputy prime minister and be charged in particular with ongoing negotiations with Syria, it said.

Barak, who served as prime minister from 1999 to 2001, was voted out of office in a landslide in the wake of the failed Camp David peace talks and the outbreak of the latest Palestinian intifada in September 2000.

© 2008 Agence France-Presse