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Attorney General Menachem Mazuz informed interim Prime Minister Ehud Olmert yesterday that Yisrael Beiteinu head Avigdor Lieberman cannot serve as public security minister because he is the subject of an ongoing police investigation.

As a result, Yisrael Beiteinu is thinking of backing out of coalition negotiations.

"The game's over," a senior party official told Haaretz. "We won't have the public security portfolio, and we won't be in the cabinet. Kadima is leaving us now like a corpse for organ donation. As long as we're in the background, they can use us as pressure in negotiations with other parties. But it appears that our job in this game has come to an end."

However, the party has not officially ended coalition talks.

"Everyone knows that this is a political decision, and Olmert must prove his leadership and do the right thing in appointing the public security minister," Yisrael Beiteinu said in a statement.

Lieberman is under police investigation on suspicion of involvement in illicit business dealings in Russia and corruption offenses related to election campaign funding in 1998 and 1999. Lieberman has been investigated several other times as well, and for years has waged a public campaign against the Police Investigations Department. Olmert has previously said he could see no reason not to appoint Lieberman to the position unless a legal obstacle comes up.

The attorney general and State Prosecutor Eran Shendar made their decision after receiving a police briefing on the investigation.

Senior police officials said yesterday they thought the Lieberman case would continue at least another few weeks and that there would be no decision on whether to indict him or close the case before coalition talks are slated to end next week.

Meanwhile, top Yisrael Beiteinu officials said they did not think the public security portfolio would be given to MK Yisrael Hasson, No. 3 on the party's list, citing Olmert's statement that he would not give the ministry to anyone in the party other than Lieberman. The issue goes to the heart of the relationship between Yisrael Beiteinu and its voters, since Russian speakers gave the party eight seats on the assumption that it would sit in the government.

Nonetheless, party officials have rejected the possibility of challenging the attorney general's decision in the High Court of Justice, fearing that a High Court ruling would only make matters worse by giving Lieberman's disqualification an official stamp of approval.

Kadima officials, however, expect that Lieberman will end up going to the High Court and that the ministry will be given to Hasson in the meantime. The officials said that on the basis of conversations they have had with top jurists, Lieberman has a good chance of winning a High Court petition. If that were to happen, Lieberman would take over the ministry and Hasson would become a minister without portfolio.

In any event, Kadima is making an effort to show that Olmert is interested in having Lieberman in the coalition, not only so that Kadima will have a party to its right, but also because of the Russian speakers it does not want to alienate.

Jonathan Lis contributed to this story.