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JERUSALEM, Sunday (Reuters)

Israeli Prime Minister Ariel Sharon meets his Likud party rival Benjamin Netanyahu on Sunday in fresh talks to build a new coalition after the resignation of Labour Party ministers last week.

Sharon filled the defence minister's job on Saturday when former army chief Shaul Mofaz accepted the position.

Netanyahu, Israeli prime minister from 1996 to 1999, was, however, expected to turn down the post of foreign minister, in what would be a blow to Sharon's efforts to put together a narrow right-wing coalition.

Political sources said Sharon has also suggested the finance post to Netanyahu, who has expressed concerns about the economy.

Netanyahu, 53, who has played a high-profile part in defending Israel's handling of the two-year-old Palestinian uprising, wants to take over from Sharon as prime minister rather than be his subordinate.

But if he turns down the Foreign Ministry job, the Likud party, still reeling from the Labour walkout and scrambling to stay in power, could split.

Netanyahu this year led a Likud leadership vote against the idea of a fully fledged Palestinian state. Popularly known as "Bibi", he has said he would challenge Sharon in a yet to be scheduled Likud primary.

Sharon was also due to meet ultranationalist parties on Sunday in a bid to shore up his government, which lost its parliamentary majority when Labour quit in a row over funding for Jewish settlements.

A more right-wing government could stoke tension with the Palestinians and clash with U.S. efforts to lower Middle East violence and win backing for a possible campaign against Iraq.

The nomination of Mofaz, known for his tough tactics against the Palestinians, will be brought before the Israeli parliament for endorsement on Monday.

Sharon faces the worst domestic political challenge since he took power in 2001 after six centre-left Labour ministers, including former Defence Minister Binyamin Ben-Eliezer and Foreign Minister Shimon Peres, resigned on Wednesday.

Their resignations took effect on Saturday.

Sharon, riding high in opinion polls, will have to hold an early election should his coalition-building fail. He now holds 55 of parliament's 120 seats. The next election is scheduled for October 2003.

Mofaz, who ended a four-year term as chief of staff in July, has advocated expelling Palestinian leader Yasser Arafat and led the Israeli military campaign to occupy Palestinian cities in response to attacks by Palestinian militants on Israel.

At least 1,640 Palestinians and 623 Israelis have been killed since the Palestinian uprising began in September 2000.

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