NEW ERA BEGINS IN ISRAEL : NETANYAHU PONDERS CABINET SELECTIONS.

Byline: Serge Schmemann The New York Times

Confirmed as the winner in Israel's leadership race by the narrowest of margins, Benjamin Netanyahu turned Friday to the task of reassuring anxious Arab neighbors and sifting through candidates for a new Cabinet.

After counting absentee ballots through much of the day, the Israeli Election Commission finally declared Netanyahu the winner over Prime Minister Shimon Peres by 29,457 votes, 1,501,023 to 1,471,566.

Netanyahu made no public statement, and his victory address is not expected until Sunday evening. But his bustling camp reported that he had received a call from President Clinton, who invited him to Washington, and that Netanyahu had telephoned the leaders of Jordan and Egypt.

His associates also said the prime minister-elect's candidates for the key ministries of Foreign Affairs and Defense would be men from the moderate end of the spectrum in the conservative Likud.

Given the closeness of the vote, the last-minute endorsement of several ultra-Orthodox rabbis probably gave Netanyahu the critical boost over the top. Apparently in a gesture to his new partners, Netanyahu, television cameras in tow and a black yarmulke on his head, made a stop Friday to pray at the Western Wall.

The tightness of the election was underscored by the fact that 145,000 voters had cast blank ballots for prime minister, indicating disenchantment with both candidates. About 12,000 of those were cast by Arabs, many presumably to register their anger over the Israeli military operation in Lebanon last month.

The Election Commission also confirmed a new Parliament in which small parties will hold almost half the seats, and religious parties will have an unprecedented representation, with more than a fifth of the votes.

The official count allowed Netanyahu, who at 46 will be Israel's youngest prime minister, to start shaping a coalition in Parliament and forming a Cabinet. Only when his government is accepted by Parliament will he be formally sworn in, the eighth person to serve as prime minister since Israel's founding in 1948.

Peres also telephoned Netanyahu to congratulate him. Peres gave no indication of his own plans, but speaking briefly to reporters outside his office, he vowed to remain true to the peace effort with the Palestinians that he and his predecessor, Yitzhak Rabin, began in 1993.

``We shall support the peace process wherever we shall be,'' Peres said. ``We shall oppose, of course, any attempt to stop it because in our judgment this was not a choice between parties, but a choice between two different ways, and we shall remain loyal to our way.''

The results sent Netanyahu's followers celebrating outside his Jerusalem home and in the streets of Tel Aviv, while Peres' crestfallen flock mourned at the site of the assassination of Rabin, the prime minister whose death at the hands of a Jewish nationalist in November sanctified him among liberal Israelis as a martyr for peace.

But the sharp divisions that the election revealed also set many Israelis anxiously wondering about the state of their nation.

Above all, the voting demonstrated that the peace with the Palestinians, so welcomed by the rest of the world when it was undertaken in 1993, raised more fear than hope among a majority of Jews in Israel.

``Half of the public in Israel is now going around with a feeling that redemption is at hand, and the other believes that it is trapped in a hell on earth,'' wrote Hemi Shalev, a columnist for the newspaper Maariv. ``Some rejoice; others weep.''

Among the latter, Rabin's outspoken widow, Leah, created a stir when she told an interviewer, ``All I want to do is pack my bags and get out of here.''

In Hebron, Geula Cohen, a leader of the militant Jewish settlers who have made the West Bank city into a cauldron of Arab-Jewish tension, declared, ``I think that in the end we have been saved from a great catastrophe.''

The dominant question is how Netanyahu will proceed with the Arabs. In the immediate aftermath of the election, the prime minister-elect's advisers did their best to project an image of moderation and reason.

A foreign affairs adviser to Netanyahu, Dore Gold, said he had telephoned Mahmoud Abbas, a senior Palestine Liberation Organization official better known as Abu Mazen, and had received a ``positive and businesslike response.'' Gold, an American-born researcher with the Jaffee Center for Strategic Studies at Tel Aviv University, gave no details of the talk, which he said was the first contact anyone from the Likud Party has ever had with the PLO.

Gold also said Netanyahu had spoken with King Hussein of Jordan and President Hosni Mubarak of Egypt, leaders of the two neighboring Arab countries that have made peace with Israel. They and Yasser Arafat, the Palestinian leader, are to meet in Jordan next week to assess the developments in Israel.

There was no immediate reaction from Arafat, who made no attempt to hide his strong preference for Peres during the campaign. Already under fire from many Palestinians for making too many concessions to Israel, Arafat's position could be seriously compromised if the new Israeli government puts the brakes on the negotiating process.

The next bellwether of Netanyahu's intentions will be his choice of Cabinet ministers, which he intends to announce within two weeks.

Initial indications were that he did not intend to cede either foreign affairs or the Defense ministry to the two biggest hawks on his side, Ariel Sharon or Rafael Eitan.

The foreign ministry is expected to go to David Levy, who held the same post in a previous Likud government. Levy split with Netanyahu and Likud last year to form his own party of Sephardic Jews, but he dropped out of the prime minister race and returned to the fold during the campaign, presumably with the promise that the foreign ministry would be his if Likud returned to power.

Though not regarded as an expert in foreign affairs, Levy is considered moderate by Likud standards. One handicap is that he does not speak English, but Netanyahu would in all likelihood retain control over the crucial relations with the United States from his own office.

In the Defense ministry, initial indications were that Netanyahu intended to offer it to Yitzhak Mordechai, a recently retired general who was popular as Northern Commander. Mordechai also is regarded as relatively moderate, enough so that he also was courted by Labor after he left the army.

Also cited as possible candidates for Defense were Dan Meridor, a justice minister in the previous Likud government, and Ehud Olmert, the popular mayor of Jerusalem.

Though excluded from Foreign Affairs or Defense, Sharon, a former general and Defense Minister who has made no secret of his disdain for the Labor government's peace agreements, was likely to emerge as Finance Minister, a post that would give him influence over the allocation of funds for Jewish settlements in the West Bank, which he helped found and ardently supported in the past. Settlement expansion was frozen under the Labor government.

Another expected appointment was that of Zalman Shoval as ambassador to Washington, where he served as ambassador under previous Likud governments. The current ambassador, Itamar Rabinovich, who was appointed by Rabin, announced that he was resigning.

CAPTION(S):

2 Photos

Photo: (1) Prime minister-elect Benjamin Netanyahu prays at the Western Wall.

(2--color) NETANYAHU

Associated Press