Rather than continue to try to cobble together a multiparty coalition, she announced Sunday that she would call for early elections, putting the peace process on hold and moving up a national vote in Israel by more than a year, most likely to February.
While some would declare failure in Ms. Livni's decision to give up on hammering out a new coalition government, Livni's supporters say that the move is an exercise of her self-confidence. They say she's refusing to kowtow to special interests and can beat the right-wing candidate who will be her nemesis in upcoming elections: Benjamin Netanyahu.
Speculation began growing last week that Prime Minister-designate Livni would call off coalition talks when the political party Shas said it would not join her government
"I will not give in to blackmail," Livni told one of Israel's largest newspapers, Maariv.
Shas, an ultra-Orthodox party representing Jews of Middle Eastern descent, tried to get Livni to shift away from the pro-peace agenda that she's sought so far and to agree to allocate additional funds to Shas supporters.
The two main breaking points in the coalition talks were Shas' insistence on a raise in government subsidies to large families and its demands for a guarantee from Livni that she would not agree to sharing control of Jerusalem with the Palestinians.
Israel occupied the eastern half of the city in 1967 and later annexed it; Palestinians aspire to have their capital in East Jerusalem, and the city remains one of the key points of contention in future peace talks.
"When it became clear that parties were taking advantage of the opportunity to pose illegitimate demands, both economic and political, I decided to stop and move ahead with elections," Livni said in a statement issued by her office. She predicted that Kadima, "having proven it does what is right," would emerge as the clear winner in an election early next year.
Until then, Ehud Olmert, who is the subject of a major corruption probe that forced him to step down from his position as the head of the Kadima Party, will remain as premier, albeit as a "lame duck" leader. Middle East analysts note that this is likely to nix whatever shred of hope the Bush administration might have had left to uphold a promise to get to a new Israeli-Palestinian peace deal by the end of 2008.
Livni has an image as a squeaky clean politician – uncommon in Israel – and her refusal to bend to the demands of Shas could help her maintain that persona in the eyes of many mainstream Israelis.
"She wants to keep her image as Mrs. Clean," says Shmuel Sandler, a Bar-Ilan University political scientist. "So she decided it's better for her to take a gamble and have elections, and maintain her image. She's saying: I won't make deals like this, I won't be blackmailed. It might help her, but it's going to be quite close."
Her strongest contender will be the leader of the right-wing Likud party, Mr. Netanyahu, who served as a prime minister in the late 1990s and as a finance minister afterwards.
But Professor Sandler says that if the world economic situation continues to slump and puts additional pressure on the Israeli economy, many may turn to Netanyahu, who is viewed as having a successful tenure as a finance minister who deregulated large state bureaucracies.
"For the economic situation, people will look at Mr. Economy, and for many people that's Netanyahu," he adds. "He stands for a free economy, and yet [a] model of a free economy was what's been so hard hit. But will the average voter understand that?"
Livni had been scheduled to formally convey her decision to President Shimon Peres in the early afternoon Sunday. But she postponed that meeting after parliament speaker Dalia Itzik embarked upon a last-ditch bid to salvage coalition talks.
If that effort fails, elections for Israel's 120-seat parliament, scheduled for November 2010, are likely to be moved up to February or March 2009, political commentators have said. In his ceremonial role, Mr. Peres makes the final decision on whether and when to hold elections.
• Material from the Associated Press was used in this report.