JERUSALEM (Reuters) - Differences over Palestinian statehood are likely to scupper Benjamin Netanyahu's efforts to forge a broad government with his main rival, Foreign Minister Tzipi Livni, an official from his Likud party said Thursday.

The hawkish Netanyahu, tapped by Israel's president to try to form a governing coalition, planned to meet Livni Friday in another attempt to recruit her centrist Kadima party, which backs the Palestinians' quest for a state.

Israel needs a government and it will get one soon, Netanyahu told reporters before a meeting with George Mitchell, Barack Obama's Middle East envoy, who is on his second visit to the region since the U.S. president took office.

Netanyahu wants to shift the focus of U.S.-sponsored peace talks from thorny territorial issues that would set the boundaries of a state to shoring up the Palestinian economy.

Netanyahu has spoken about Palestinian self-government but alluded only in general terms to a state, saying it must have limited sovereign powers and be demilitarized. He has made no commitment to trade occupied land for peace.

There is across-the-board agreement on Iran, Hezbollah and Hamas but there is a big gap between Kadima and Likud on the two states for two people. It's insolvable, Silvan Shalom, a senior Likud legislator and former foreign minister, told Army Radio.

Palestinian Prime Minister Salam Fayyad, who meets Mitchell Friday, said the Palestinian Authority would not be able to pursue peace talks with Israel if Netanyahu's government did not express a clear and honest stance on the two-state solution.

Livni has said Kadima would not join a government that does not commit clearly to pursuing a peace deal under which a Palestinian state would be created.

LAND-FOR-PEACE

As Israel's chief negotiator with the Palestinians in the outgoing government, Livni has been at the forefront of a land-for-peace process whose declared aims are to achieve a viable Palestinian state and security for Israel.

Unfortunately the answers we are receiving from Kadima leaders is that there is no chance of her changing her position. And it seems that tomorrow she will say a final 'no', Shalom told Israeli Army Radio.

Asked about Shalom's remarks, a Kadima spokeswoman said Livni's position was unchanged.

Mitchell will meet with members of the outgoing Israeli government on ways to revive peace talks. He will also hold talks with Fayyad and President Mahmoud Abbas in the West Bank.

Kadima won 28 of parliament's 120 seats, to right-wing Likud's 27, in a February 10 election. But a strong nationalist bloc emerged from the ballot and Netanyahu has the support of 65 right-wing lawmakers, enough to form a narrow government.

A right-wing coalition could lead to friction with the Obama administration, which has pledged to move swiftly toward an Israeli-Palestinian peace deal.

Under his mandate from President Shimon Peres, Netanyahu has another 36 days to win parliamentary approval for a government.

(Additional reporting by Ali Sawafta in Ramallah; Editing by Louise Ireland)

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