Prime Minister Ariel Sharon dissolved the Israeli parliament today and called for early elections in three months, giving up on attempts to form a new government with right-wing allies to replace his collapsed national unity coalition.

Sharon's decision ended a week of political haggling that began when the Labor Party resigned last Wednesday from his broad alliance, ostensibly over budget allocations. He tried for six days to lure smaller ultranationalist and Orthodox Jewish parties to join his Likud Party in a narrow-based government. But in the end, Sharon said at a news conference, the smaller parties made "unacceptable" demands that amounted to "blackmail" and "extortion," leaving him six votes shy of a majority in the 120-member parliament and unable to form a stable coalition.

"Elections are the last thing the country needs right now," but that option was "the lesser of two evils," Sharon said. "I will not surrender to political blackmail from any party."

Analysts said it was unlikely any progress could be made in resolving the Palestinian-Israeli conflict during an Israeli election campaign, meaning that contacts between the Israeli government and Yasser Arafat's Palestinian Authority will likely be reduced, providing an opportunity for tension to rise and violence to continue.

"It's going to be very dangerous," said the Palestinian minister for local government and chief negotiator with the Israelis, Saeb Erekat. "The competition between [former prime minister Binyamin] Netanyahu and Sharon will translate into more Palestinian blood, more occupation and more incursions. I'm very worried about the next three months."

Under Israeli law, elections must be held on the last Tuesday before the expiration of a 90-period that started today. Giora Pordes, a spokesman for Israel's parliament, the Knesset, said that means the vote will be held on Jan. 28. In the meantime, Sharon will head a caretaker government.

National elections had been scheduled for next October. Bringing them forward nine months and collapsing the campaign season to 90 days should lead to intensely hard-fought political battles, analysts and politicians said. While Sharon couched the decision in terms of what is best for Israel, political observers said it was also based on calculations of what was best for him.

"When you are in a minority government, you are humiliated every week in the Knesset, where you face no-confidence votes every week and you have to buy votes one by one from minor political parties," said Nahum Barnea, a leading political columnist and analyst. "You are humiliated so much that when it comes to Election Day, you are considered a failure. So the only alternative for Sharon was to let go."

Sharon came to power in February 2001 in a direct election for prime minister, routing Labor's candidate, the incumbent Ehud Barak, 62 percent to 38 percent. After the vote, however, Israel scrapped the direct vote for the office. This time, the prime minister will be the leader of the party that wins the most seats in parliament.

That sets the stage for fierce competitions within the leading parties. The first is Nov. 19, when the Labor Party holds a primary to select its leader. Opinion polls give the lead to Amram Mitzna, mayor of Haifa and a former army general, followed by Haim Ramon, a party stalwart and parliament member. The current party chief, outgoing defense minister Binyamin Ben-Eliezer, has been third in the surveys.

Labor quit the government last week after Sharon refused to cut $147 million from the budget for Jewish settlements in the West Bank and Gaza Strip and spend it on programs for the poor and elderly. But most analysts have said Ben-Eliezer precipitated the dispute to gain support from his party's left wing, which is furious that Labor was such an eager partner in a coalition led by the notoriously hawkish Sharon.

"I don't think Labor gained from this maneuver, because it was perceived as a maneuver," said Abraham Diskin, a political scientist at Jerusalem's Hebrew University. Furthermore, he said, it would be difficult for top Labor leaders "to attack a government that they held important positions in until a week ago."

Sharon's right-wing Likud Party has not yet set a date for its primary elections, but Sharon is expected to face a tough challenge from Netanyahu, who has been one of Sharon's toughest critics from the right. In three surveys of likely Likud voters published in the past 11 days, Sharon had a 29-point edge in one and a 12-point lead in another, while Netanyahu was favored by four points in the third.

Netanyahu agreed today to become foreign minister in the caretaker government. His decision could cut two ways politically, analysts said. As foreign minister, his job will be to defend Sharon on key policy issues, especially abroad. On the other hand, Netanyahu will have one of the most visible positions in Israel from which to wage a primary election battle against his nominal boss, with plenty of free media attention.

"Netanyahu has no intention of serving in Sharon's government or being his foreign minister, not now, not tomorrow and not in two months," said Shimon Shiffer, a political columnist at the newspaper Yedioth Aharonoth. "What we see here are political moves, a game of giants, a game of chess." Asked how the pair would work together, he said, "They won't."

Many analysts expressed the belief that accelerated elections would benefit Sharon in particular and the right wing in general. Sharon is riding high in the polls; a shortened campaign season will give his opponents less opportunity to tarnish his image and boost their own, analysts said. Furthermore, after two years of bloody conflict with Palestinians fighting against continued occupation in the West Bank and Gaza Strip, recent surveys show a decisive shift to the right in the Israeli electorate.

A survey published Friday by Globes, an Israeli business journal, found that if elections were held now, the number of Knesset seats held by Likud would increase from 19 to about 35, while the number held by Labor would decrease from 25 to about 18.

At the same time, many surveys show that Israelis are tired of the conflict and would welcome a political solution, despite their strong support for Sharon's security policies. The country's weak economy is the issue on which Sharon is most vulnerable. Israel is in a deep recession, with unemployment and inflation rising, and wages and growth steeply declining.

In his news conference, Sharon would not explicitly say what "unacceptable" demands had been made that caused him to favor early elections rather than continued negotiations with right-wing parties. In recent days, Sharon confidants said that some parties and politicians were making serious budget demands, while others were pressing Sharon to change policies and declare opposition to an independent Palestinian state.

That, Sharon's advisers said, was unacceptable because Sharon has expressed commitment to a peace initiative by the Bush administration that envisions an independent Palestinian state by the end of next year, provided a number of conditions are met.

Eliezer Cohen, a member of the ultranationalist Yisrael Beiteinu party who was negotiating with Sharon's lieutenants about joining the government, said he was stunned to hear on the radio this morning that Sharon was calling for new elections on the radio while riding to work this morning.

"This is not a smoke screen. It's a huge, giant cloud of smoke," Cohen said. "Mr. Sharon and Mr. Ben-Eliezer in Labor had their reasons to go for elections, and it was just for the reasons of primaries in their parties. This is the one and only reason."

Israeli Prime Minister Ariel Sharon said the right-wing parties he was negotiating with made "unacceptable" demands.