Israeli Prime Minister-designate Tzipi Livni warned Sunday that time is running out for a peace agreement with the Palestinians, with extremists gaining strength as negotiations stumble.

In her first foreign policy speech since her appointment to form a new government, Livni said Israel must press ahead with peace talks because 'doing nothing has its own price.'

Israel and the Palestinians resumed talks last November at an international conference hosted by President Bush. They set a target date of January 2009, when Bush leaves office, for completing a peace deal, but little apparent progress has been made, and both sides cast severe doubt about meeting the target.

Livni, who heads the Israeli negotiating team, warned there are dangers in letting the process drag on indefinitely.

'An understanding of what is under way in the region shows that time is not working in the favor' of Israel and regional moderates, she said. She was referring to the growing strength of Islamic Hamas militants, who overran the Gaza Strip last year and are challenging moderate Palestinian President Mahmoud Abbas in the West Bank.

Livni spoke at a strategy conference in Jerusalem. She is currently the foreign minister in Prime Minister Ehud Olmert's transition government.

Plagued by multiple corruption investigations, Olmert resigned last month after his party chose Livni to replace him.

Livni is trying to put together a majority coalition government. She has until Nov. 3, but she warned that protracted political turmoil could be harmful.

'Creating political stability quickly is necessary not for political needs, but so that we can ... deal with the challenges from outside, economic and others,' she said.

If Livni fails to form a government, Israel would have to hold a general election early next year. Hard-line Likud opposition leader Benjamin Netanyahu is confident of victory, running roughly even with Livni in current polls. He opposes most concessions to the Palestinians for peace.

Livni said peace talks with the Palestinians must continue regardless of the leadership changeovers in the U.S. and Israel.

She emphasized that the goal is a full peace treaty, breaking from Olmert, who despaired of completing an accord by the target date and hoped for a declaration of principles or status report instead.

She endorsed the Palestinian view of the negotiations as an all-or-nothing affair, with no partial accords or agreements on some issues but not others. She said the two sides concur that 'nothing is agreed upon until everything is agreed upon.'

Also unlike Olmert, Livni did not spell out the shape of an agreement as she sees it. In a newspaper interview last week, Olmert said peace would mean Israel's relinquishing control of the West Bank or equivalent territory as well as much of the Arab section of Jerusalem.

'We agreed to handle the talks in the negotiating rooms, not in the headlines,' Livni said.

Setting borders is just one of the core issues that have stymied negotiators for years. Others are control over Jerusalem's explosive holy sites and a solution for Palestinian refugees. A host of security issues also confronts the two sides after decades of violent confrontation.

Livni warned against allowing Israel's internal political unrest and the U.S. election campaign to deflect the two sides from their goals.

'If we leave the negotiating rooms and look at the calendar, or think that a government is changing, or an administration is changing, and we have to reach something partial, something that doesn't offer a response to the genuine demands of the Palestinians and Israelis,' she said, 'that will be a mistake that we can't allow ourselves.'

Also Sunday, Olmert and Livni met separately with visiting French Foreign Minister Bernard Kouchner. He said he hopes Livni can establish a government quickly.

Kouchner says he was told of 'real progress' in peacemaking during his talks, but he feared that all sides are waiting for the Israeli and U.S. political pictures to clear up.