Israeli voters punish Netanyahu but keep him in power

By Alistair Lyon

JERUSALEM (Reuters) - Benjamin Netanyahu set about forging a new ruling coalition on Wednesday after Israeli voters fed up with state coddling of ultra-Orthodox Jews chastised him by propelling an upstart centrist party to prominence.

Tuesday's vote crystallized demands for attention to bread-and-butter issues over the ambitions of religiously fired hardliners, and largely sidelined foreign policy issues such as Iran's nuclear plans and Palestinian aspirations.

The right-wing prime minister claimed victory after his Likud party and its ultranationalist Yisrael Beitenu ally took 31 of parliament's 120 seats, according to a near-final tally.

That made it the biggest single bloc, despite losing 11 of its previous seats. Overall, right-wing factions emerged with roughly half the total. Final results are expected on Thursday.

Making a virtue of necessity, a weakened Netanyahu has signaled a desire to broaden his coalition with centre-left parties that would lend it a more moderate gloss.

Such a shift could ease friction between him and U.S. President Barack Obama, himself embarking this week on a new term in office and who wants to avert an Israeli attack on Iran and restart stalled peace talks with the Palestinians.

"The likelihood of a purely right-wing government has receded, along with the headaches that would cause for Obama," said David Makovsky, an expert at the Washington Institute for Near East Policy. "So there's a better chance for Netanyahu to find a ‘modus vivendi' with the U.S."

Israeli media highlighted the electoral setback for Netanyahu and the surprise surge of the centrist Yesh Atid (There is a Future) party, runner-up with 19 projected seats in a parliament likely to include about a dozen parties in all.