Jerusalem ? Prime Minister Ariel Sharon ousted his hawkish rival, Benjamin Netanyahu, from the Foreign Ministry on Wednesday after forging a rightist governing coalition that includes parties who oppose a Palestinian state and support Jewish settlement expansion in the West Bank and Gaza Strip.

Sharon offered Netanyahu the Finance Ministry in his next government after awarding the Foreign Ministry to Silvan Shalom, the current finance minister and a longtime loyalist.

Netanyahu balked at first but was later reported to be negotiating to take the finance post with expanded powers, including responsibility for negotiating loan guarantees from the United States.

Sharon’s new government includes his Likud party, with 40 seats in the Knesset, the stridently secularist Shinui party, with 15 seats, the pro-settlement National Religious Party, with six seats and the far-right National Union party with seven seats. The coalition gives Sharon a 68-seat majority in the 120-member Knesset.

The positions of the smaller rightist parties are expected to make it harder to pursue peace moves leading to a Palestinian state and a freeze of Israeli settlement activity.

Saeb Erekat, the chief Palestinian negotiator, said Sharon’s new government will be a “government of settlement activities, of more military escalations and incursions,” adding that “the thing that will be absent is the peace process.”

Shinui, a strong opponent of state subsidies and army exemptions for ultra-Orthodox Israelis, will be awarded the justice and interior ministries, with the justice portfolio going to Yosef “Tommy” Lapid, the party leader.

Left outside the coalition was the ultra-Orthodox Shas party, a longtime Likud ally with 11 seats in the Knesset.

The Labor party, the second largest faction in the Knesset with 19 seats, will also be in the opposition after Sharon failed to persuade it to join his government. Amram Mitzna, the Labor leader, said that Sharon had refused to agree to a removal of Jewish settlements and on further peace moves.

Mitzna advocates an immediate resumption of peace talks with the Palestinians and a withdrawal of soldiers and settlers from the Gaza Strip. He has vowed to rebuild Labor, soundly defeated in last month’s national election, from the opposition.

Sharon is expected to formally present his new government today.