(Reuters) - Israeli Prime Minister Benjamin Netanyahu formed a unity government on Tuesday in a surprise move that could give him a freer hand to attack Iran´s nuclear facilities and seek peace with the Palestinians.

The coalition deal, negotiated secretly over the past days and sealed at a private meeting overnight, means the centrist Kadima party will join Netanyahu´s rightist coalition, creating a majority with 94 of parliament´s 120 seats.

The alliance, which replaces plans announced just two days earlier for a snap election in September, will be one of the biggest in Israel´s history - though an opinion poll found only 39 percent of Israelis supported it and 34 percent were opposed.

"This government is good for security, good for the economy and good for the people of Israel," Netanyahu told a joint news conference with Kadima leader Shaul Mofaz, a former defense chief who began secret talks on a deal last week.

The new coalition would, Netanyahu said, focus on redrafting the budget, on electoral reform and on what he called sharing out military duties across the population - his religious coalition partners had unsettled the government by opposing plans to end exemptions from the draft for ultra-Orthodox Jews.

Among other goals of the new government would, the prime minister said, be "to try to advance a responsible peace process" with the Palestinians: "Not all has been agreed but we have a very strong basis for continued action," he said, urging Palestinians to "come sit with us for serious negotiations".

Asked how the new alliance would address Israel´s concern that Iran is secretly developing nuclear weapons, Netanyahu replied: "Of course one of the important issues is Iran."

Environment Minister Gilad Erdan said the accord would help build support for any action against Iran´s atomic program, which Israel views as a threat to its survival despite Iranian insistence that it is seeking only nuclear energy, not bombs.

"An election wouldn´t stop Iran´s nuclear program. When a decision is taken to attack or not, it is better to have a broad political front, that unites the public," he told Israel Radio.

PEACE TALKS AN "IRON CONDITION"

Mofaz has long blamed Netanyahu for the failure of peace talks with the Palestinians. He said on Tuesday that "entering peace negotiations was an iron condition for forming the unity government."

Peace talks have been suspended for 18 months in a dispute over Jewish settlement building in the occupied West Bank and Palestinians say they cannot resume unless such construction is frozen. Netanyahu has called for talks without preconditions.

The Palestinians responded cautiously.

In an interview with Reuters, Palestinian President Mahmoud Abbas said it was too soon to comment directly on the new Israeli coalition. He was waiting for a reply from Netanyahu to a letter he sent last month and he was ready to engage if the Israeli leader proposed "anything promising or positive".

A spokesman for Abbas called on Israel to "use the opportunity provided by the expansion of its coalition government" to expedite a peace accord, demanding Israel halt building settlements on land the Palestinians want for a state.

"The new coalition government needs to be a coalition of peace and not a coalition for war," Nabil Abu Rdainah said.

The new coalition accord says the new administration will "work towards the resumption of the peace process and promoting talks with the Palestinian Authority".

But it also noted "the importance of maintaining defensible borders", a phrase Netanyahu has used in the past to deflect Palestinian demands for extensive Israeli withdrawal from the West Bank, territory captured in a 1967 war.

"PACT OF COWARDS"

The accord stunned the political establishment and drew swift censure from the centre-left Labour party, which surveys had predicted would make electoral gains at Kadima´s expense.

"This is a pact of cowards and the most contemptible and preposterous zigzag in Israel´s political history," Labour leader Shelly Yachimovich was quoted as saying in the media, while some commentators hailed Netanyahu´s political prowess.

The next election is due in October 2013 but Netanyahu had pushed this month for an early poll after divisions emerged in his coalition over the new military conscription law. Parliament was preparing to dissolve itself and clear the decks for a September 4 ballot while the backroom talks with Kadima were under way.

"When it turned out it was possible to set up the biggest government in Israel´s history ... I thought we could restore stability without elections, so I decided to set up a broad national unity government," Netanyahu said.

One politician privy to the deal said the idea was first aired only last week, when Mofaz paid respects to Netanyahu as the prime minister mourned his father, who died on April 30.

SIGNAL TO IRAN

Under the coalition accord, Mofaz will be vice premier. In a previous stint as deputy prime minister in 2008 he was among the first Israeli officials to air publicly the possibility of an attack on Iran.

But the Tehran-born Mofaz has since been more circumspect while in opposition, saying Israel should not hasten to break ranks with world powers that are trying to pressure Iran through sanctions and negotiations rather than force.

Gerald Steinberg, political scientist at Bar-Ilan University near Tel Aviv, said the coalition deal "sends a very strong signal to Tehran, but also to Europe and the United States, that Israel is united and the leadership is capable of dealing with the threats that are there if and when it becomes necessary".

The Obama administration, which has played up its pro-Israel credentials ahead of the November election in the United States, said coordination on the Palestinians and Iran would continue.

"A new coalition in Israel certainly will not affect our policy approach. We continue to have very good relations with leaders in Israel," said White House spokesman Jay Carney.

Israeli officials say the next year may be crucial in seeing whether Iran will curb its nuclear plans in the face of international condemnation and Western sanctions. Iran will discuss its nuclear program with major powers on May 23.

Iran regularly rejects foreign accusations it is working on developing a nuclear bomb, saying its program is for energy and medical needs. On Tuesday, its Foreign Ministry spokesman Ramin Mehmanparast dismissed threats of attack as "propaganda".

Israel is reputed to have the region´s only nuclear arsenal.

Kadima, with 28 seats, will add significant weight to the coalition, but it remains uncertain how it will get along with religious and ultra-right parties also in the cabinet.

Intra-government relations are likely to be tested swiftly over the issue of settlement building after the high court ordered the government on Monday to demolish five apartment buildings in a Jewish settlement in the occupied West Bank.

Many Netanyahu supporters want him to adopt legislation to legalize settlements, such as the Ulpana apartments, which a court has ruled were built on privately owned Palestinian land.

It is not clear if Kadima would support such a move, which would draw international condemnation on Israel.

(Additional reporting by Ari Rabinovitch in Jerusalem, Matt Spetalnick in Washington, and Michael Stott and Samia Nakhoul in Ramallah; Writing by Jeffrey Heller; Editing by Douglas Hamilton, Alastair Macdonald and Peter Graff) (© Thomson Reuters 2012. 05/08/12)