The party led by acting Prime Minister Ehud Olmert won the largest number of parliamentary seats in Tuesday?s elections. But Kadima's victory ? 28 seats in the 120-seat parliament ? was smaller than expected and the party will have to form a coalition with other parties to govern.

British Prime Minister Tony Blair, who called Olmert to offer his congratulations, said Kadima's victory ?changes the shape of Israeli politics. I look forward to meeting him soon to discuss his plans to take the peace process forward,? Blair said in a statement released by his office. ?I urge all parties to pursue a path of positive engagement.?

Olmert said he was ready for new talks with the Palestinians but warned that Israel would act on its own to draw its final borders if a peace accord cannot be reached.

This scenario appears increasingly likely following Hamas' victory in recent Palestinian legislative elections. The militant group's new government, which rejects peace talks and refuses to recognize Israel?s right to exist, was set to be sworn into office late Wednesday.

Palestinian President Mahmoud Abbas said the results of the Israeli election would have little effect unless Olmert modifies his stance. ?We want negotiations and not to dictate unilateral solutions,? he said in Khartoum, Sudan, where he was attending an Arab Summit. French Foreign Minister Philippe Douste-Blazy welcomed Kadima?s victory as ?good news for peace.?

Security and peace

While Olmert is ?a man of unilateral policies ... he has always wanted to recognize the existence of two peoples, two states that live in security and peace one next to the other,? Douste-Blazy said on LCI television.He later told reporters the world must not turn its back on the Palestinian people.

?We must work toward the economic development of Gaza and the West bank because (not to) would be a major political error,? Douste-Blazy said. ?If there is no plan for the young people who are unemployed in Gaza there will never, never be peace.?

He said the international community should demand that Hamas recognize Israel but also ask Israel to recognize the so-called road map for peace and not to impose policies on the Palestinians.

The 25-nation EU ?looks forward to working with? the new Israeli government, said EU External Relations Commissioner Benita Ferrero-Waldner. ?Taken together with the recent Palestinian elections, the vote in Israel will have a shaping influence on the prospects for moving toward a peaceful resolution to the Israeli-Palestinian conflict,? Ferrero-Waldner said. The EU, like the United States and other top donors, refuses to talk to Hamas, which it considers a terrorist organization.

The bloc has decided to hold off a decision on future funding for a Hamas-led Palestinian Authority until it officially takes power.

NEGOTIATIONS

Olmert Begins Talks to Form Coalition

■ Ehud Olmert began informal negotiations with dovish and religious factions to try to knit together a coalition government that will give him the freedom to partially withdrawal from the west bank. Olmert has said he prefers to set Israel's borders in the framework of a peace deal. But he plans to unilaterally withdraw from most of the West Bank while strengthening Israel's hold over major settlement blocs if an agreement cannot be reached quickly. Such an agreement appeared highly unlikely with Hamas' rise to power. The Islamic militant group is responsible for dozens of suicide attacks on Israel. Israel refuses to deal with Hamas unless it renounces violence, recognizes Israel's right to exist and respects past accords. Hamas has brushed off those demands and quickly rejected Olmert's plan. Israeli officials said they would continue working with Abbas, but do not see him as an alternative to Hamas. ?We are all very cognizant of the fact that the real political power has been transferred, unfortunately, to Hamas,? Foreign Ministry spokesman Mark Regev said. ?And there has to be a question, when you deal with someone, when you negotiate with someone, do they have the ability to deliver?? President Bush congratulated Olmert in a phone call Wednesday and invited him to Washington after he forms his government. Olmert told Bush he planned to follow in the footsteps of Prime Minister Ariel Sharon, who remains comatose after suffering a devastating stroke receive tacit support from Arab parties that won 10 seats. Olmert and Labor leader Amir Peretz plan to meet in the coming days. Labor lawmaker Eitan Cabel said the party would seek the coveted Finance Ministry. But Olmert, a staunch capitalist, opposes that, Kadima officials said. ?We have more than one option to establish a government.