Yisrael Beiteinu Chairman Avigdor Lieberman, a far-right politician whose policies have raised Arab ire and international concern, was designated on Monday as foreign minister in a governing pact with Benjamin Netanyahu.

Enlisting his first coalition partner as prime minister-designate, Netanyahu signed up Yisrael Beitenu, a widely expected move that left the right-wing Likud party leader still short of a governing majority in parliament.

The agreement stated that Likud and Yisrael Beitenu favored the creation of a wide coalition, leaving the door open for centrists to join, and raised the possibility that someone else may become foreign minister if other parties join the coalition.

Likud officials have said a "unity government" including the middle-of-the-road Kadima party led by current Foreign Minister Tzipi Livni could help avoid friction with U.S. President Barack Obama, who has pledged to pursue Palestinian statehood.

Addressing Kadima legislators after the Netanyahu-Lieberman deal was announced, Livni reaffirmed one of her party's main conditions for joining a broad coalition: the continuation of land-for-peace negotiations with the Palestinians.

"Joining a [narrow coalition government] and serving as a fig leaf in order to bolster a different policy is certainly not the right thing to do," she said.

Netanyahu has proposed shifting the focus of the talks to economic issues.

Lieberman, a native of former Soviet Moldova, has stirred controversy by advocating the trading of land where many of Israel's 1.5 million Arab citizens live for settlements in the West Bank in a peace deal with the Palestinians.

His agreement with Likud would allow for stripping Israelis of citizenship rights over involvement in what Israel sees as terrorism or espionage.

In response to the proposed deal, Israeli Arab MK Ahmed Tibi urged an international boycott of Lieberman. "No minister should meet him, especially no Arab minister," Tibi told Reuters.

Under Israeli law, Netanyahu has until April 3 to put together an administration and have it approved by parliament.

Though it avoids any mention of U.S.-backed diplomacy seeking a two-state solution between Israel and the Palestinians, the agreement elicited swift expressions of concern on the part of Arab and other world officials.

Javier Solana, the European Union's foreign policy chief, suggested Europe consider taking steps if the next Israeli government backed away from Western-supported peace negotiations on creating a Palestinian state alongside Israel.

"We will be ready to do business as usual, normally with a government in Israel that is prepared to continue talking and working for a two-state solution," Solana said in Brussels. "If that is not the case, the situation would be different."

"We stand for a two-state solution," said EU External Relations Commissioner Benita Ferrero-Waldner. "What we want to see is a foreign minister of the Israeli government that accepts a two-state solution."

Lieberman's party won the third largest number of seats in a February 10 election in which Israel swung to the right after a 22-day offensive in the Gaza Strip, territory run by Hamas Islamists opposed to Palestinian President Mahmoud Abbas's peace efforts.

The coalition accord sets a "strategic goal" of toppling Hamas rule in the enclave, going beyond Israel's current aim of halting rocket fire, and could complicate Western efforts to reopen Gaza border crossings to vital goods.

Livni has demanded a commitment from Netanyahu to a two-state solution as a condition for joining a coalition. She is also seeking a power-sharing deal by which she and Netanyahu would rotate as prime minister.

Netanyahu, who clashed with former U.S. President Bill Clinton over Middle East policies when he was prime minister from 1996 to 1999, wants to shift the focus of peace talks from territorial to economic issues, a plan rejected by Palestinians.