"Israeli media say it has been signed, but our contacts with the Kadima party say that although agreement is close, it has not actually been signed.

"But we are very near to that giant step of Tzipi Livni becoming the next prime minister."

Concessions

Chater said that the Labour party did not get the increases in the government budget they were asking for as part of the deal.

However, it did get some of the concessions they wanted, for instance, an increase in student fees.

But the seats of Labour and Kadima do not add up to a majority needed to run parliament. The support of the ultra-Orthodox Shas party is necessary to gain a majority.

The Shas party has demanded increases to child subsidies and a promise not to negotiate with the Palestinians over Jerusalem, to join the coalition.

Al Jazeera’s Ayman Mohyeldin in Jeruslam said it was vital that Livni wins over Shas support.

"At this stage it is a numbers game.

"Livni needs to get 61 members of the Knesset to form her government. According to the agreement she has with Labour, she will need another 11 to be designated prime minister.

"Shas has about 12 seats in the parliament, so if she is able to bring them on board she would hit that magical number. They have a lot of weight right now.

"They are being tempted with all types of offers to appease their voters, but at the same time they are being lured away by the right wing Likud party which is headed up by Benjamin Netanyahu, the former prime minister, who is urging Shas to hold out for general elections that polls indicate he would win."

Livni has set a deadline of October 27 to form a coalition. Otherwise elections to choose a new prime minister will have to be held.