Tel Aviv  - Israeli prime minister-designate Benjamin Netanyahu of the Likud party signed his first coalition agreement overnight with the ultranationalist Israel Beiteinu party of Avigdor Lieberman, who would be foreign minister, Israel Radio reported.

   The pact was signed five weeks after Israeli elections were held. Netanyahu, of the hardline but mainstream Likud, continued to hold coalition negotiations with other parties.

   Lieberman could become a controversial foreign minister. He was accused of racism in his election campaign, which focussed on what he called Israeli Arabs' lack of "loyalty" to the state.

   His party would also receive the tourism, infrastructure, immigrant absorption and internal security ministries.

Netanyahu's 28-day deadline for the formation of a government runs out on the coming Friday. In Israel's February 10 parliamentary elections, six rightwing, extreme rightwing, ultra-religious and settler parties won 65 of the 120 parliamentary seats. These parties reject the peace process with the Palestinians in its present form.

Lieberman's party, with 15 seats, is the third strongest in the Knesset.

In response to the likelihood of a rightwing government in Israel, European Union foreign ministers insisted that Israel keep working towards a two-state solution in its conflict with the Palestinians.

"One would of course expect that a new Israeli government would respect the previous obligations: that includes the commitment to a two-state solution," Swedish Foreign Minister Carl Bildt said as he arrived in Brussels for regular talks with EU counterparts.

The EU's top diplomat, Javier Solana, backed that call, saying that the EU "will be ready to do business as usual normally with a government of Israel that is prepared to continue talking and will keep working for a two-state solution. If that is not the case the solution would be different."

Lieberman, in an interview published March 1 in US daily Washington Post, stated that he would accept some sort of Palestinian state.

   Netanyahu is still seeking to persuade the centrist Kadima party of outgoing Foreign Minister Tzipi Livni to join his coalition. Livni has made her entry into a coalition dependent on Netanyahu's recognition of the Annapolis peace process, which calls for the formation of an independent Palestinian state. She is also demanding a rotation of the premiership.

   Likud and Israel Beiteinu noted that should a government of national unity be formed that includes Kadima, their agreement could undergo changes.

   Furthermore, one of the key disagreements between Israel Beiteinu and other, ultra-Orthodox and religious parties that Netanyahu wants to join his government was over civil unions between non-Jewish couples.

   Lieberman's party base includes many immigrants from the former Soviet Union, some of whom are not considered Jews under Jewish religious law. Lieberman himself was born in Moldova and immigrated to Israel at the age of 20.

   The sides agreed that legislation on civil marriages between Israeli non-Jews would be resolved within two months. A committee would then be formed to find a solution for other couples within 15 months.