The Kadima leader told his party he was prepared to hold peace talks with the Palestinians but would act alone if he had to, to establish permanent borders for Israel by 2010.

But with his margin of victory much less decisive than the party had hoped, he could have trouble forming and maintaining a stable coalition, say correspondents.

Kadima is expected to enter into coalition talks with second-placed Labour and other smaller parties.

Israel's President Moshe Katsav said he would start talking to party leaders next week. A Kadima official told the Haaretz newspaper he expected a coalition to emerge after the Passover holiday, in about three weeks' time.

Standing in front of a massive picture of Ariel Sharon, Mr Olmert paid tribute to his stricken predecessor before laying out his plans for his four-year term in office.

"In the coming period we will move to set the final borders of the state of Israel, a Jewish state with a Jewish majority," Mr Olmert told Kadima members in what was effectively his victory speech.

"We will try to achieve this in an agreement with the Palestinians. This is our hope and prayer."

He told the Palestinian leadership: "We are ready to compromise, to give up parts of the beloved Land of Israel... and evacuate, under great pain, Jews living there, in order to create the conditions that will enable you to fulfil your dream and live alongside us."

But he said it was time for the Palestinians to "relate to the existence of the state of Israel, to accept only part of their dream, to stop terror, to accept democracy and accept compromise and peace with us".

Palestinian protests

The BBC's Jeremy Bowen in Jerusalem says Mr Olmert's task will not be easy.

He will face stiff opposition from Israel's settler movement, will have to convince the US to back his plan, and will not be able to ignore a Hamas-led Palestinian government, our correspondent says.

Palestinian leader Mahmoud Abbas said the "result was expected", but that Mr Olmert should return to the internationally-backed roadmap peace plan and "abandon his unilateral plans to fix the borders".

The new Palestinian cabinet, led by Islamic militant group Hamas, will be sworn in on Wednesday afternoon. It may not be long after that that the Palestinians' relationship with Israel sinks to new lows, says the BBC's Alan Johnston in Gaza.

Voter turnout in the Israeli election was 62.3%, a record low.

With 99% of ballots counted, Kadima has won 21.8% or 28 seats, with the centre-left Labour party coming second with 20 seats, a 15.1% share.

Under Israel's complex proportional representation, the exact number of seats may change as the final votes are redistributed.

Likud blow

The right-wing former ruling party, Likud, is trailing with just 11 seats - behind the ultra-Orthodox Shas, with 13, and the far-right Yisrael Beitenu party, which proposes forcibly transferring Arab populations inside Israel to Palestinian territory, with 12.

Likud leader Binyamin Netanyahu admitted they had "suffered a tough blow" but vowed to rebuild the party.

Since the creation of Israel in 1948, the country has been governed either by the Labour or Likud parties, so a Kadima victory is historic.

Kadima, which means "forward" in Hebrew, was founded by Mr Sharon last year after he left Likud amid bitter rows over his withdrawal of settlers and troops from the Gaza Strip.

Mr Sharon suffered a stroke and fell into a coma in January.

Israel occupied Gaza and the West Bank, including east Jerusalem in the 1967 war. Its settlements are illegal under international law, although Israel rejects that.

Mr Olmert's centrist-party Kadima won 28 of the 120 seats in the Israeli parliament after Tuesday's poll.

Analysts said they thought Kadima would win a more conclusive victory and it was unclear who would get the finance portfolio in the new government.

In morning trading on Wednesday, the Tel Aviv 25 Index of leading shares was down 1.7% at 822.77.

The Israeli shekel, meanwhile, fell 0.5% against the US dollar.

Coalition uncertainty Kadima emerged as the largest single party in Tuesday's poll, ahead of main opponents Labour and Likud, and will head a coalition government.

Mr Olmert says he is willing to hold peace talks with the Palestinians, an approach investors feel will bring greater economic stability to Israel.

However, analysts expressed concerns that Mr Olmert may have to make major spending commitments to lure potential partners into a governing coalition.

The market fall also reflected concerns that potential coalition partners - which could include left-leaning Labour and the ultra-orthodox party Shas - could have clashing social and economic attitudes.

"The issue here is economic. That is going to be the problem," said Richard Gussow, an analyst at Israeli stockbrokers Excellence Nessuah.

"Right now there is a lot of uncertainty, particularly in relation to the finance ministry."

Israel's economy performed strongly under the leadership of Ariel Sharon, Mr Olmert's predecessor, who formed Kadima last year.

It was, as noted, published in the London Review of Books, which is far more open to discussion on these issues than US journals -- a matter of relevance (to which I'll return) to the alleged influence of what M-W call "the Lobby." An article in the Jewish journal Forward quotes M as saying that the article was commissioned by a US journal, but rejected, and that "the pro-Israel lobby is so powerful that he and co-author Stephen Walt would never have been able to place their report in a American-based scientific publication." But despite the fact that it appeared in England, the M-W article aroused the anticipated hysterical reaction from the usual supporters of state violence here, from the Wall St Journal to Alan Dershowitz, sometimes in ways that would instantly expose the authors to ridicule if they were not lining up (as usual) with power.

M-W deserve credit for taking a position that is sure to elicit tantrums and fanatical lies and denunciations, but it's worth noting that there is nothing unusual about that. Take any topic that has risen to the level of Holy Writ among "the herd of independent minds" (to borrow Harold Rosenberg's famous description of intellectuals): for example, anything having to do with the Balkan wars, which played a huge role in the extraordinary campaigns of self-adulation that disfigured intellectual discourse towards the end of the millennium, going well beyond even historical precedents, which are ugly enough. Naturally, it is of extraordinary importance to the herd to protect that self-image, much of it based on deceit and fabrication. Therefore, any attempt even to bring up plain (undisputed, surely relevant) facts is either ignored (M-W can't be ignored), or sets off most impressive tantrums, slanders, fabrications and deceit, and the other standard reactions. Very easy to demonstrate, and by no means limited to these cases. Those without experience in critical analysis of conventional doctrine can be very seriously misled by the particular case of the Middle East(ME).

But recognizing that M-W took a courageous stand, which merits praise, we still have to ask how convincing their thesis is. Not very, in my opinion. I've reviewed elsewhere what the record (historical and documentary) seems to me to show about the main sources of US ME policy, in books and articles for the past 40 years, and can't try to repeat here. M-W make as good a case as one can, I suppose, for the power of the Lobby, but I don't think it provides any reason to modify what has always seemed to me a more plausible interpretation. Notice incidentally that what is at stake is a rather subtle matter: weighing the impact of several factors which (all agree) interact in determining state policy: in particular, (A) strategic-economic interests of concentrations of domestic power in the tight state-corporate linkage, and (B) the Lobby.

The M-W thesis is that (B) overwhelmingly predominates. To evaluate the thesis, we have to distinguish between two quite different matters, which they tend to conflate: (1) the alleged failures of US ME policy; (2) the role of The Lobby in bringing about these consequences. Insofar as the stands of the Lobby conform to (A), the two factors are very difficult to disentagle. And there is plenty of conformity.

Let's look at (1), and ask the obvious question: for whom has policy been a failure for the past 60 years? The energy corporations? Hardly. They have made "profits beyond the dreams of avarice" (quoting John Blair, who directed the most important government inquiries into the industry, in the '70s), and still do, and the ME is their leading cash cow. Has it been a failure for US grand strategy based on control of what the State Department described 60 years ago as the "stupendous source of strategic power" of ME oil and the immense wealth from this unparalleled "material prize"? Hardly. The US has substantially maintained control -- and the significant reverses, such as the overthrow of the Shah, were not the result of the initiatives of the Lobby. And as noted, the energy corporations prospered. Furthermore, those extraordinary successes had to overcome plenty of barriers: primarily, as elsewhere in the world, what internal documents call "radical nationalism," meaning independent nationalism. As elsewhere in the world, it's been convenient to phrase these concerns in terms of "defense against the USSR," but the pretext usually collapses quickly on inquiry, in the ME as elsewhere. And in fact the claim was conceded to be false, officially, shortly after the fall of the Berlin Wall, when Bush's National Security Strategy (1990) called for maintaining the forces aimed at the ME, where the serious "threats to our interests... could not be laid at the Kremlin's door" -- now lost as a pretext for pursuing about the same policies as before. And the same was true pretty much throughout the world.

That at once raises another question about the M-W thesis. What were "the Lobbies" that led to pursuing very similar policies throughout the world? Consider the year 1958, a very critical year in world affairs. In 1958, the Eisenhower administration identified the three leading challenges to the US as the ME, North Africa, and Indonesia -- all oil producers, all Islamic. North Africa was taken care of by Algerian (formal) independence. Indonesia and the were taken care of by Suharto's murderous slaughter (1965) and Israel's destruction of Arab secular nationalism (Nasser, 1967). In the ME, that established the close US-Israeli alliance and confirmed the judgment of US intelligence in 1958 that a "logical corollary" of opposition to "radical nationalism" (meaning, secular independent nationalism) is "support for Israel" as the one reliable US base in the region (along with Turkey, which entered into close relations with Israel in the same year). Suharto's coup aroused virtual euphoria, and he remained "our kind of guy" (as the Clinton administration called him) until he could no longer keep control in 1998, through a hideous record that compares well with Saddam Hussein -- who was also "our kind of guy" until he disobeyed orders in 1990. What was the Indonesia Lobby? The Saddam Lobby? And the question generalizes around the world. Unless these questions are faced, the issue (1) cannot be seriously addressed.

When we do investigate (1), we find that US policies in the ME are quite similar to those pursued elsewhere in the world, and have been a remarkable success, in the face of many difficulties: 60 years is a long time for planning success. It's true that Bush II has weakened the US position, not only in the ME, but that's an entirely separate matter.

That leads to (2). As noted, the US-Israeli alliance was firmed up precisely when Israel performed a huge service to the US-Saudis-Energy corporations by smashing secular Arab nationalism, which threatened to divert resources to domestic needs. That's also when the Lobby takes off (apart from the Christian evangelical component, by far the most numerous and arguably the most influential part, but that's mostly the 90s). And it's also when the intellectual-political class began their love affair with Israel, previously of little interest to them. They are a very influential part of the Lobby because of their role in media, scholarship, etc. From that point on it's hard to distinguish "national interest" (in the usual perverse sense of the phrase) from the effects of the Lobby. I've run through the record of Israeli services to the US, to the present, elsewhere, and won't review it again here.

M-W focus on AIPAC and the evangelicals, but they recognize that the Lobby includes most of the political-intellectual class -- at which point the thesis loses much of its content. They also have a highly selective use of evidence (and much of the evidence is assertion). Take, as one example, arms sales to China, which they bring up as undercutting US interests. But they fail to mention that when the US objected, Israel was compelled to back down: under Clinton in 2000, and again in 2005, in this case with the Washington neocon regime going out of its way to humiliate Israel. Without a peep from The Lobby, in either case, though it was a serious blow to Israel. There's a lot more like that. Take the worst crime in Israel's history, its invasion of Lebanon in 1982 with the goal of destroying the secular nationalist PLO and ending its embarrassing calls for political settlement, and imposing a client Maronite regime. The Reagan administration strongly supported the invasion through its worst atrocities, but a few months later (August), when the atrocities were becoming so severe that even NYT Beirut correspondent Thomas Friedman was complaining about them, and they were beginning to harm the US "national interest," Reagan ordered Israel to call off the invasion, then entered to complete the removal of the PLO from Lebanon, an outcome very welcome to both Israel and the US (and consistent with general US opposition to independent nationalism). The outcome was not entirely what the US-Israel wanted, but the relevant observation here is that the Reaganites supported the aggression and atrocities when that stand was conducive to the "national interest," and terminated them when it no longer was (then entering to finish the main job). That's pretty normal.

Another problem that M-W do not address is the role of the energy corporations. They are hardly marginal in US political life -- transparently in the Bush administration, but in fact always. How can they be so impotent in the face of the Lobby? As ME scholar Stephen Zunes has rightly pointed out, "there are far more powerful interests that have a stake in what happens in the Persian Gulf region than does AIPAC [or the Lobby generally], such as the oil companies, the arms industry and other special interests whose lobbying influence and campaign contributions far surpass that of the much-vaunted Zionist lobby and its allied donors to congressional races."

Do the energy corporations fail to understand their interests, or are they part of the Lobby too? By now, what's the distinction between (1) and (2), apart from the margins?

Also to be explained, again, is why US ME policy is so similar to its policies elsewhere -- to which, incidentally, Israel has made important contributions, e.g., in helping the executive branch to evade congressional barriers to carrying out massive terror in Central America, to evade embargoes against South Africa and Rhodesia, and much else. All of which again makes it even more difficult to separate (2) from (1) -- the latter, pretty much uniform, in essentials, throughout the world.

I won't run through the other arguments, but I don't feel that they have much force, on examination.

The thesis M-W propose does however have plenty of appeal. The reason, I think, is that it leaves the US government untouched on its high pinnacle of nobility, "Wilsonian idealism," etc., merely in the grip of an all-powerful force that it cannot escape. It's rather like attributing the crimes of the past 60 years to "exaggerated Cold War illusions," etc. Convenient, but not too convincing. In either case.