ISRAEL - Dec 17 - Sharon Agrees Deal With Labour To Form New Coalition.

PM Sharon, and Labour opposition leader Shimon Peres, reach a deal on forming a new coalition early next week. The agreement would bring eight Labour members about a third of the cabinet into government alongside ministers from Sharon's Likud party. The prime minister wants to expand the coalition to ensure implementation of his plan to withdraw Jewish settlements from Gaza and part of the West Bank. The alternative to a partnership with Labour would be to call early elections that would delay the Gaza plan. If parliament approves the deal, it would mark Labour's return to government after a two-year break. Labour, which failed to sway voters in January 2003 with its own proposal of unilateral disengagement from the Palestinians, has supported Sharon in the Knesset against rightwing opponents of withdrawal. Peres will be given the title of Deputy PM in the PM's, according to Israeli media reports. His partnership with Sharon will bring together the two oldest veterans of the Knesset. Both see the Gaza plan as vital to Israel's diplomatic and economic interests. Likud-Labour talks broke down this week over the distribution of cabinet posts. Some Labour politicians argued that the party should enter the government without portfolios and quit once the settlement withdrawal was completed next year. There was no official statement last night from either Likud or Labour headquarters. Although media reports said the deal was done Dec 16 morning, it was not confirmed until after the start of the Jewish Sabbath. A spokesman for Peres Yoram Dori, said final, minor details of the deal would be worked out between negotiators at a meeting today. The agreement would still have to be endorsed by Labour's central committee. Sharon has headed a minority government since the summer, when a number of right wingers opposed to his Gaza plan were either sacked or resigned. His position in the Knesset was further weakened when he sacked ministers of the centrist Shinui party for protesting against his plans to bring ultra-Orthodox parties into government. A deal with Labour would give him the support of 59 members of the 120-member Knesset. So far, there has been no agreement to ensure a majority by bringing in the ultra-Orthdox Shas and United Torah Judaism parties. Shas refuses to endorse the Gaza withdrawal on the grounds that the plan is a unilateral Israeli move. It may drop its opposition if Sharon agrees to co-ordinate the pullout with the Palestinians following presidential elections in the PA on Jan 9. Six Palestinians were killed and 24 wounded in the Gaza Strip Dec 16 when Israeli forces trying to halt Palestinian rocket and mortar fire raided the town of Khan Yunis, witnesses said. They said the dead included four militants and two bystanders. The army used tanks and bulldozers to demolish buildings in Khan Yunis it said were being used as cover by militants. During the Israeli incursion, Palestinian militants fired two Kassem rockets into Israel, causing no casualties or damage. They were the latest in a series of strikes aimed at Jewish settlements in Gaza and across the border into Israel. Six Palestinians were, meanwhile, rescued after they spent 12 hours trapped in a smugglers' tunnel that collapsed near an Israeli army post at the southern Gaza town of Rafah.