The ultra-Orthodox Shas party announced Friday that it would not join a coalition led by Israeli Foreign Minister Tzipi Livni, dealing a serious blow to her efforts to form a government by early next week.

Shas' decision, which came after Livni issued an ultimatum late Thursday, greatly enhances the chances that early elections will be held in Israel by March, a year ahead of schedule.

The party's Council of Torah Sages, headed by Shas spiritual leader Rabbi Ovadia Yoseph, decided in a telephone vote Friday morning to reject the final offer she had made to raise child allowances for large families, a top priority for the party.

A statement sent by the party to the media said that it decided against joining the coalition under the current circumstances, because its two demands - "assistance for the weak strata of society" and "protection of Jerusalem" - had not been met.

Shas wanted a commitment by Livni that she would not negotiate Jerusalem in her talks with the Palestinians and it demanded an extra 1.5 billion Israeli shekels (some 400 million dollars) in the 2009 budget for child allowances.

Most of the party's supporters are ultra-Orthodox, Sephardic Jews, or Jews of oriental origin, with large families, who depend on high monthly child benefits to get by.

Livni's representatives had said they had offered almost 1 billion shekels in child benefits and alternatives.

Livni told her party headquarters near Tel Aviv late Thursday that she would announce to Israeli President Shimon Peres on Sunday whether she was giving up her efforts to form a government, which would mean new elections within 90 days, or present her coalition to the Knesset on Monday, the first day the Israeli parliament returns from its summer recess.

Livni, who was elected leader of Israel's ruling Kadima party last month, had said she wanted to present her government by then, although by law she has until November 5.

"I know that we must pay and I am willing to pay in order to form a government, especially when I also know the price of elections in Israel. But I'm not willing to pay any price or to cross a line which in my eyes constitutes a lack of responsibility that we all have toward the state," she said.

"This is the time to decide for all of us: either a government, or elections. And that decision will fall on Sunday."

Shas, which has 12 mandates in the 120-seat Knesset, is a key coalition candidate, without whom Livni will have no majority in the parliament, unless another ultra-Orthodox party, the United Torah Judaism (UTJ) with six mandates, joins without Shas.

That party has however said so far it would not sit in a government without its fellow ultra-Orthodox party.

Livni's only remaining option is a minority government including the Labour Party, the Pensioners Party, the left-liberal Meretz party and the external support of Arab parties.

Kadima held the September 17 primaries in which she was chosen to find a replacement for Ehud Olmert, who has resigned the premiership and party leadership to fight corruption charges.

His resignation, under Israeli law, means the automatic resignation of his entire cabinet as well, which has become a transitional government that continues to be led by Olmert until a new government is formed or early elections are held.