Sources close to Kadima Chairwoman Tzipi Livni said Friday that the ultra-Orthodox Shas Party had "deceived the entire country" through their refusal to join a coalition government, after spending weeks making it appear that they would sign such an agreement with Livni.

Kadima sources also blamed internal disagreements within Shas for the party's refusal to sign a coalition agreement.

Shas officials announced on Friday that it would not join a coalition led by Livni, ending weeks of uncertainty and making early elections almost inevitable.

Following the announcement of the breakdown in talks, Livni aides said on Friday that all contacts between the two sides have been severed, and that there are ongoing discussions of a possible return to the negotiating table.

"Up through Thursday night, Shas led us to believe that there is progress and that it was possible to close the deal," a Livni associated said.

Aides to the Kadima chairwoman said there was absolutely no reason to rebuff what they considered a reasonable offer from Livni on the issue of child allowances for large families.

Aides say Livni also broached the subject of Jerusalem, which Shas has demanded remain off the negotiating table in talks with the Palestinians. In an effort to reach a creative compromise solution, Livni reportedly proposed that Yishai publicly deliver of letter listing his reservations on the matter.

In light of Shas' refusal to join the coalition, Livni advisors are investigating the possibility of an alternative government without Shas, one that would rest on the support of Labor, Meretz, the Pensioners, and all of, or a faction of, United Torah Judaism. Such a coalition would also need to rely on support from opposition MKs.

Livni associates are divided over the question of forming a slim-majority government or declaring early elections at this stage.

Livni set an ultimatum on Thursday, giving her potential coalition partners three days to join a new government under her leadership or face the prospect of new elections.

In response to the Shas announcement, Livni spokesman Gil Messing said Friday only that the ultimatum still stood.

Shas spokesman Roy Lachmanovich said in a statement on Friday that the party was unable to reach agreement with Livni's Kadima party over two main issues - the status of Jerusalem and social welfare benefits for the poor.

"Shas has asked only for two things ... real financial help for the [economically] weak in Israeli society and protection for Jerusalem ... which is not merchandise for sale."

Lachamnovich said that as a result, the party's spiritual leader, Rabbi Ovadia Yosef, who heads a group of sages who determine party policy, decided not to continue coalition talks.

"Shas cannot be bought and Shas will not sell out on Jerusalem. This has been our consistent line throughout negotiations," said Shas Chairman Eli Yishai, trade and industry minister in the outgoing government.

"If there could have been a commitment that there will not be negotiations over Jerusalem ... We could have recommended to the party to approve a deal," Yishai said.

On Thursday, it was reported that Livni had said she would discuss a demand from Shas to extend the rabbinical courts' jurisdiction to civil disputes between couples to try to persuade the ultra-Orthodox party to join the coalition.

Consequently, Shas reported some progress in the coalition negotiations on Thursday. Shas had previously demanded expanding the rabbinical courts' jurisdiction during 2006 coalition negotiation with Prime Minister Ehud Olmert.

However Olmert, Justice Minister Daniel Friedmann and Social Affairs Minister Isaac Herzog objected to this demand, which they said would infringe on the secular public's rights and undermine the status quo.

Shas had recently raised this demand in talks with Livni, arguing that an agreement on this issue had already been reached and must be kept.

Livni also agreed to revoke the reduction in the yeshiva budget, estimated at NIS 400 million, for 2009. However, Shas is still dissatisfied with Livni's offer regarding child allowances. Shas is demanding NIS 1 billion while Livni is willing to give NIS 600 million in the 2009 budget and give Shas NIS 350 million for sectorial needs detailed in the coalition agreement.

With two days to go before Livni's deadline, the possibility of a deal remained open. The Shas statement - like Livni's ultimatum - might be mainly a bargaining tactic.

Polls indicate the right-wing opposition, which has condemned Olmert's peace moves, would win an early parliamentary election. The next scheduled ballot is not until 2010.

Yishai hinted the party could still change its mind, telling Israel Radio that the party had not decided that new elections should be held. "The decision was in Kadima's hands," he said, "and if they don't meet our demands, we won't be able to join."

"Nothing happened. I suggest everyone wait patiently," said MK Otniel Schneller of Livni's Kadima Party.