In Gaza, Palestinian President Mahmoud Abbas swore in a Hamas government, handing the militants an administration on the brink of financial collapse and fighting Western isolation.

The United States in response ordered its diplomats and contractors not to have contacts with any Palestinian ministries, U.S. officials said. Hamas is committed to Israel's destruction.

Appealing to Abbas, Olmert, head of the centrist Kadima party, said Israel favored peace negotiations to end decades of conflict.

But in the continued absence of talks -- a remote prospect with Hamas now in power -- Olmert has vowed to draw Israel's frontier by 2010 by removing isolated settlements in the occupied West Bank and expanding bigger ones.

Palestinians say such a move would annex land and deny the viable state they seek in the West Bank and Gaza Strip. Abbas told reporters in Gaza the Palestinians "will not accept, at any price" unilateral Israeli moves.

Kadima fared worse than expected in Tuesday's poll, signaling Olmert might struggle to sustain support for his plan. The party's showing of 28 seats in the 120-member parliament was among the lowest for an election winner.

But some political analysts said Olmert should be able to stitch together a coalition that would avoid the need to negotiate with right-wing parties opposed to any withdrawal from West Bank land that settlers see as a biblical birthright.

"I think we can run a government with 28 seats. It will be difficult, but possible," elder statesman and senior Kadima politician Shimon Peres said on Army Radio.

In separate comments to Channel 2 television, Peres said it would be "at least a year" before Olmert's West Bank plan is put into effect.

The sweeping measures would uproot tens of thousands of settlers, far more than the 8,500 evacuated from Gaza last year, while tracing a border along a fortified barrier Israel is building inside the West Bank, where some 240,000 Israelis live among 2.4 million Palestinians.

COOPERATION

After the Hamas cabinet members took the oath of office, Palestinian Prime Minister Ismail Haniyeh pledged "coordination and cooperation" with Abbas, whose Fatah movement had refused, along with all other factions, to join a governing coalition.

The president coaxed Hamas to accept a cease-fire with Israel last year but the group insists it will not abandon what it calls a right of armed resistance against occupation.

Asked by reporters if Abbas could seek to revive talks with Israel on his own, Haniyeh said: "As the elected president, he can move politically in any direction he wants. We have no problem at all."

Olmert's foreign minister, Tzipi Livni, has publicly dismissed Abbas as "irrelevant."

In a telephone call to Olmert, U.S. President George W. Bush invited him to the White House after he forms a government. Olmert has said he would seek support from the United States and other countries before taking unilateral steps.

The new U.S. directives on dealings with the Palestinian government will limit a wide range of U.S. programs, including security coordination through the Palestinian Ministry of Interior.

Contacts will be permitted with Abbas, his personal office and non-Hamas legislators.

The Israeli election came two months after Hamas's shock win in parliamentary polls, prompting the Jewish state to halt tax revenue transfers and threats from Western countries to cut aid unless the group recognized Israel and disarmed.

Opinion polls had originally predicted Kadima would win 44 seats. Election results showed that second place went to center-left Labour, with 20 seats, while other parties netted between four and 13 seats.

Kadima, founded just four months ago, was expected to seek a coalition with Labour and small parties, in talks that could last weeks. Some religious parties and one representing pensioners could back Olmert's West Bank plan.

The World Court has ruled all 145 settlements Israel has built on occupied territory illegal. Israel disputes this.

President Moshe Katsav is expected to formally assign the task of putting together a government after consultations with parties on Sunday.