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Binyamin Netanyahu, the Israeli prime minister-designate and leader of the Likud party, has signed a coalition deal with the far-right Yisrael Beiteinu party.

Under the deal, Avigdor Lieberman, Yisrael Beiteinu's leader, would become foreign minister.

Lieberman who takes a hawkish, nationalist line on both domestic and security policies, has drawn accusations of racism for proposing that Israel's Arab citizens must sign loyalty oaths or lose their citizenship.

While it is unlikely that the plan will be implemented, Netanyahu's choice could harm Israel's international ties and even change the direction of its domestic politics.

Yisrael Beiteinu has also called for trading land on which Palestinian Israelis live in exchange for Jewish settlements in the West Bank as a prerequisit to any deal with the Palestinians.

Netanyahu favours focusing on efforts to bolster the Palestinian economy, leaving issues like borders, sovereignty and Israeli settlements to be discussed later on. 

Will there be an Israeli partner in negotiations with Palestinians? Is the new Israeli government on a collision course with the Obama administration's goals of seeking a Palestinian state? And do the so-called "moderate" Arab countries need to review their position on dealing with the new Israeli government?

Maryam Nemazee is joined by Dan Schueftan, a political science professor at Haifa University, Robert Fisk, the Middle East correspondent for The Independent newspaper, and Amr Hamzawy, senior associate at the Carnegie Endowment for International Peace.

This episode of Inside Story aired from Tuesday, March 17, 2009.