* Netanyahu and Livni agree to hold further talks * Livni says "substantial differences" remain * Livni does not rule out unity government (Updates with end of first Netanyahu, Livni talks) By Allyn Fisher-Ilan JERUSALEM, Feb 22 (Reuters) - Israel's political rivals Benjamin Netanyahu and Tzipi Livni agreed to hold further talks about a future government at their first meeting on Sunday since an inconclusive Feb. 10 election. Netanyahu, head of the hawkish Likud party, whom President Shimon Peres asked on Friday to form a new ruling coalition, vowed to press on with efforts to persuade centrist leader Livni, Israel's foreign minister, to join him in a government. He called it "the challenge of the hour and the will of the Israeli people" for Israel's two largest political forces to rule jointly to confront what they see as Iran's pursuit of a nuclear weapon, and its militia allies, Hamas and Hezbollah. Livni, head of the centrist Kadima party, said she and Netanyahu, "didn't reach any agreement, there are substantial differences," but added "it is important to investigate whether there is a common path." She agreed at Netanyahu's urging to meet again, telling reporters at the Jerusalem hotel where they had met behind closed doors that "there is no reason not to." Kadima won 28 seats to 27 for Likud in the election for Israel's 120-member parliament. In choosing Netanyahu, Peres did not follow the tradition of asking the leader of the party with the most legislators to form a government within 42 days. He opted for Netanyahu because a majority of lawmakers pledged their support for him. But a narrow government comprised of hawkish factions could put Netanyahu on a collision course with U.S. President Barack Obama and his promise to move quickly to a Palestinian statehood deal. PLEDGE TO COOPERATE WITH OBAMA Netanyahu, 59, pledged on Sunday "to cooperate with the Obama administration and to try to advance the common goals of peace, security and prosperity for us and our neighbours." He has sought to pursue that goal by enlisting Livni's party, which favours trading large parts of the Israeli-occupied West Bank for peace, into a national unity government. "Unity is reachable, through dialogue ... that is what we are going to do today, beginning with Kadima and tomorrow with Labour," Netanyahu said earlier on Sunday. But after Livni's remarks Netanyahu wasn't as optimistic, Israeli media reported, and quoted him telling advisers "nothing may come of this". Netanyahu has plans on Monday to meet Defence Minister Ehud Barak of the left-wing Labour Party, which came in fourth in the election behind Yisrael Beiteinu, a far-right party. The U.S.-educated Netanyahu has said he wants to shift the focus of stalled, Washington-sponsored peace talks with Palestinians away from tough territorial issues to shoring up their economy, an approach their leaders have rejected. As prime minister from 1996 to 1999, Netanyahu clashed with the Clinton administration but bowed to U.S. pressure and handed over parts of the West Bank city of Hebron to Palestinian rule. While not ruling out a Palestinian state, he has said it must have limited powers ensuring it is demilitarised. Livni, 50, told party loyalists before meeting with Netanyahu that seeking an alliance with his hawkish backers risked "betraying the confidence of voters" and that she would object to joining any cabinet "whose path isn't ours". In a statement, Kadima lawmakers said acceptance of the party's centrist policies on peace and domestic issues was "a condition for (the party) joining any unity government". Both Kadima and Likud advocate expanding Jewish settlements in the West Bank, in defiance of the United States, which brought little pressure on Israel during George W. Bush's presidency. (Additional reporting by Jeffrey Heller; Editing by Richard Meares) (For blogs and links on Israeli politics and other Israeli and Palestinian news, go to http://blogs.reuters.com/axismundi)
Palestinians ride a motorbike past tents for Palestinians whose houses were destroyed during Israel's 22-day offensive in Jabalya in the northern Gaza Strip February 22, 2009. REUTERS/Suhaib Salem (GAZA) ...
