Prime Minister-designate Tzipi Livni set an ultimatum on Thursday, giving her potential coalition partners three days to join a new government under her leadership or face the prospect of new elections.

Livni, who under law has until Nov. 3 to put together a parliamentary majority, informed President Shimon Peres of her decision.

"This is the time for decisions for all of us - either a government or elections and the decision will fall on Sunday and until Sunday everyone is going to have to some soul searching and make their decision," she told her Kadima party.

Since Livni's election a month ago as head of the Kadima party she has been meeting almost daily with potential partners who have made stiff demands for political posts and budget funds.

Livni also vowed not to give in to "illegitimate" demands by other parties in coalition talks. She was apparently referring to demands of Shas and the Pensioners' Party for billions extra in budget funds.

She said: "I know that you have to pay and I am willing to pay prices to form a government, especially when I know the price of holding an election in Israel but I am not willing to pay any price or to cross a line that I think will be irresponsible,"

Also Thursday, the Pensioners Party pulled out of coalition negotiations with Kadima. The party argued that the offer that had been made to them had been far from acceptable. "In this situation there is no point in engaging in negotiations - it's a waste of time," party officials said.

Coalition talks between Kadima and Shas seemed on the verge of breaking down on Wednesday night, after the ultra-Orthodox party rejected Livni's offer to raise child stipends.

Shas MKs said the Kadima chairwoman's newest offer, to transfer NIS 800 million to child stipends and various religious institutions, was insufficient.

Sources close to Livni said the offer was a "test of Shas' real intentions - whether it is conducting futile negotiations in order to bring about elections, or is actually interested in joining the government."

Kadima and Shas negotiating teams are expected to meet again on Thursday. MK Tzachi Hanegbi has joined the Kadima team in order to work to soften Shas' position.

Livni is also continuing to advance coalition talks with United Torah Judaism, Meretz and the Pensioners Party. She seeks to present a coalition on Monday, the first day of the Knesset's winter session. Without Shas, Livni will put forth a coalition with a slim majority of only 60 Knesset members.

Transportation Minister Shaul Mofaz is spearheading a campaign against a narrow coalition, which at least six Kadima MKs are expected to vote against.

Opposition to a narrow coalition is also growing within the Pensioners Party.

"Our inclination is that elections are preferable to a narrow coalition of 60 Knesset members," said party chair Rafi Eitan. "It will be impossible to work in such a government."