Jerusalem ? Prime Minister Ariel Sharon’s broad-based coalition collapsed Wednesday when Cabinet ministers from the moderate Labor Party resigned in a dispute over funding for Jewish settlements, threatening to push Israel into a bitter election.

The crisis ended an uneasy 20-month “unity government” formed as a common front against the Palestinian uprising, and could sabotage U.S. efforts to win support for a peace plan.

Sharon told parliament he would continue to lead the country, suggesting he would try to govern with a narrow coalition of far-right and religious parties rather than call early elections.

The crisis was precipitated by Sharon’s rejection of Labor Party leader Binyamin Ben-Eliezer’s demands to cut $145 million in funds for Jewish settlements in the $57 billion 2003 state budget. Compromise proposals failed and Ben-Eliezer resigned from his post as defense minister, followed by the rest of Labor’s Cabinet ministers.

Under Israeli law, the six resignations only take effect within 48 hours, leaving room for last-ditch maneuvers but politicians from both sides predicted Sharon’s broad-based coalition was at an end.

The budget was put to parliament after the Labor ministers resigned, and it passed with the support of parties outside the coalition as expected by a 67-45 vote; it must pass two more readings in coming weeks before it is final.

Several officials involved in the last-minute talks said Foreign Minister Shimon Peres, who led Labor for much of the past two decades and has been a key supporter of the unity government, tried to persuade Ben-Eliezer to back down. Peres then resigned along with Ben-Eliezer and four other Labor Party ministers.

If the resignations go through, Sharon would face the difficult choice of trying to govern with the support of an array of extreme-right and religious parties meaning political instability and constant pressures for even tougher, internationally unpopular policies concerning the Palestinians.

Israeli Foreign Minister Shimon Peres, front, signs his letter of resignation at the Knesset, Israel's parliament, in Jerusalem. Prime Minister Ariel Sharon's broad-based coalition crumbled Wednesday as Cabinet ministers from the moderate Labor Party resigned. A portrait of the late Israeli Prime Minister Yitzhak Rabin hangs in the background. Others in the photo are unidentified.

Sharon aides have said he is more likely to call elections within 90 days, but the prime minister suggested otherwise in his speech to parliament. “We will continue to lead the country in a responsible and clear-headed way,” he said.

Although polls show the bloc of parties led by Sharon’s Likud would probably win a majority of the 120 seats, there is no guarantee and Sharon himself would probably first have to beat back a challenge for the Likud leadership by former Prime Minister Benjamin Netanyahu.

Either way, the developments bode ill for U.S. efforts to win support for a three-phase peace plan envisioning a provisional Palestinian state by 2003.

Elections would mean a delay of many months, and Sharon’s far-right partners in a narrow coalition would likely object to many of the provisions, such as a settlement freeze and a significant Israeli troop pullback.