Livni has in the past said that Israel must withdraw from Palestinian areas to continue as a Jewish state.

Her fresh comments are in contrast to the position of Benjamin Netanyahu, the leader of the right-wing Likud party and Livni's main rival to become next prime minister.

Peace process

Livni also said that the internationally backed Annapolis peace process should be continued to maintain foreign support.

"If we don't continue with the plan, we will not be able to count on the support of the international community against Iran, Hezbollah [a Lebanese political party and armed group] or Hamas [which has de facto control of the Gaza Strip]," she said.

"We can carry out negotiations while still fighting against terrorism."

The peace process aims to establish separate Palestinian and Israeli states, and was re-launched at Annapolis, in Maryland in the US, in 2007 after a seven-year hiatus.

Livni, as foreign minister, has been a key player in negotiations.

Kadima won parliamentary elections last week, but gained only one more seat than Likud. 

Livni may therefore not have enough support among the other parties to form a workable ruling coalition, leaving the way open for Netanyahu to create a government.

Political negotiations

The Kadima leader has called for a power-sharing deal with Likud, but no agreement has been reached.

In a television interview later on Monday, Livni said that as prime minister she would make progress on the peace process rather than putting it on hold.

Netanyahu has said that peace talks should look to improve Palestinian daily life before discussions on core issues can begin.

Livni's comments came on the same day that the Israeli military took control of a large area of the West Bank, potentially leading to the construction of a settlement of 2,500 homes.

Israeli settlement activity has continued in the occupied West Bank, despite the practice being illegal under international law.