JERUSALEM (Reuters) - Israeli Prime Minister-designate Benjamin Netanyahu's party secured its first coalition partner on Sunday, reaching an initial agreement with the ultra-right Yisrael Beiteinu party, an official said.

The two parties would not have a majority in the 120-seat parliament and would need to secure agreements with other parties to achieve that, but it was the first step toward establishing a new Israeli government after a February 10 election.

The Yisrael Beitenu official told Reuters its members had initialed the agreement with officials of Netanyahu's Likud party, after a long session of negotiations.

Netanyahu, who served as prime minister from 1996 to 1999, faces an April 3 deadline to complete a government, after being given the task last month by President Shimon Peres.

Israeli media said the agreement would hand the foreign ministry to Yisrael Beiteinu leader Avigdor Lieberman, controversial for his anti-Arab rhetoric. His party, the third largest in parliament, would get five cabinet posts, the reports said.

A narrow right-wing government and a prominent role for Lieberman could put Netanyahu on a collision course with the administration of U.S. President Barack Obama who has pledged to pursue an Israeli-Palestinian peace deal.

Yisrael Beiteinu, which won 15 seats in the 120-member parliament, wants to trade land where Israeli-Arab citizens live in exchange for Jewish settlements in the West Bank in any peace deal with Palestinians.

Lieberman has called for all Israelis to take an oath of loyalty to the Jewish state as a condition for citizenship.

Despite the deal with Lieberman's party, Netanyahu's deputies were continuing efforts to win support from outgoing Foreign Minister Tzipi Livni's centrist Kadima party.

Livni has demanded Netanyahu commit to U.S.-backed talks with Palestinians for a two-state solution, as a condition for joining any government.

Netanyahu, who clashed with former U.S. President Bill Clinton over Middle East policies when he was last prime minister, has said he wants to shift the focus of Palestinian statehood talks from territorial to economic issues, a plan rejected by Palestinians.

Livni, whose party outpolled Netanyahu by one seat in the election, has also demanded a power-sharing arrangement in exchange for joining a government alongside him.

Gideon Saar, a senior Likud lawmaker, told the Ynet news website that despite Sunday's deal we have not shut the door to a unity government (with Kadima) and that cabinet positions were still negotiable.

(Writing by Allyn Fisher-Ilan; Editing by Ori Lewis and Elizabeth Piper)

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