Israel's interim Prime Minister Ehud Olmert says he will seek to build a coalition with Israel's Labor Party. Labor Party leader Amir Peretz says he is optimistic a government can be formed soon.

A week after Israelis went to the polls, a new Israeli government is taking shape.

Acting Israeli Prime Minister Ehud Olmert, left, shakes hands with Labor Party leader Amir Peretz, before making announcement to the press at the Prime Minister's office in Jerusalem, Tuesday, April 4, 2006

Kadima Party head Ehud Olmert and Labor Party leader Amir Peretz, say they have agreed to work together to form the next government. Ehud Olmert whose party won 29 seats in the election - more than any other - says Kadima and Labor are natural allies.

Olmert says after two days of talks the two men agreed that the Labor Party will be a senior partner with Kadima in any new government.

The announcement follows reports of a rift between Olmert and Peretz following comments by the Labor Party leader over the past few days that he would attempt to form a government on his own, with the help of smaller parties. Now, Peretz says he wants a coalition with Olmert.

Peretz says he has no doubt the new government will be able to set Israel's goals for the future.

Neither of the two men would discuss the distribution of cabinet portfolios. With Kadima's 29 seats and Labor's 19 seats both parties will still have to work hard to get other parties to join their coalition, to get a working majority in the 120-seat Knesset.

The announcement is a boost to Ehud Olmert's plan to withdraw from most of the West Bank in the next four years. Under the plan, which was originally proposed by now comatose Prime Minister Ariel Sharon, Israel will consolidate nearly all West Bank settlements in three large settlement blocs and use the controversial Israeli-built security barrier as the basis for a border with Palestinians.

Palestinians have condemned the plan, calling it a land-grab that violates international law.