But, presenting his new government to parliament and using a phrase he has used in past major policy speeches, Netanyahu said his administration "extends its hand in peace" to the Palestinians.

"With a Palestinian partner who is willing to conduct negotiations in good faith, Israel will be prepared for a historic compromise that will end the conflict with the Palestinians forever," he said, repeating a pledge he made at the start of short-lived peace talks in 2010.

New Defence Minister Moshe Yaalon, a member of Netanyahu's Likud party, opposes any curbs on settlement-building that Palestinians say must stop before they can return to the U.S.-sponsored negotiations, which collapsed over the issue.

Israeli construction in the occupied West Bank, territory which the Palestinians want along with East Jerusalem and the Gaza Strip for an independent state, must be signed off by the Defence Ministry.

Yaalon's predecessor, Ehud Barak, who headed a center-left party but did not run in the January 22 election, was often accused by settlers of impeding settlement projects.

"The incoming defense minister, Moshe Yaalon, has sworn allegiance to Judea and Samaria," Nahum Barnea, a political commentator for the Yedioth Ahronoth daily, wrote, using the Biblical names for the West Bank.

Palestinians say that Israeli settlements, considered illegal by most countries, will deny them a viable state.

OBAMA VISIT

The settlement issue, along with Iran's nuclear program, are likely to figure prominently in talks this week in Jerusalem between Netanyahu and Barack Obama, who will be visiting Israel and the West Bank for the first time as U.S. president.

"We face very great threats. Iran continues in its race to obtain an atomic bomb. It continues to enrich uranium in order to produce a bomb," Netanyahu told parliament.

"At the United Nations, in September, I presented a red line. Iran has not crossed it but it is approaching it," he said, repeating an assessment he has voiced in recent months.

"It must not be allowed to cross this line," he reiterated, referring to the accruement of sufficient fuel for a potential first bomb.

Netanyahu has said Iran could reach that stage by this spring or summer. Obama said last week it would take Iran more than a year to produce one.

The Islamic Republic denies seeking nuclear weapons, saying it is enriching uranium only for electricity and medical uses.

After weeks of coalition negotiations, Netanyahu signed pacts with the centrist Yesh Atid and far-right Jewish Home parties on Friday, clinching a parliamentary majority.

The Knesset was to ratify the new government later on Monday, the first in a decade to exclude ultra-Orthodox Jewish factions that are at odds with Yesh Atid and Jewish Home over reducing state benefits for religious families and institutions and limiting military draft deferments for seminary students.

Among the top new ministers in the cabinet are Yair Lapid, a former TV news anchor whose Yesh Atid party came in a surprise second to Netanyahu's right-wing Likud-Beitenu list, and Naftali Bennett, a former settler leader and head of Jewish Home.

Netanyahu's new housing and construction minister, Uri Ariel, is a settler himself and member of Jewish Home. He said on Sunday the new cabinet would continue to expand settlements "more or less as it has done previously".

Several months ago, Israel announced plans to build more than 11,000 new houses in the West Bank and East Jerusalem, almost double the 6,800 it has erected since March 2009 when Netanyahu took office, the anti-settlement Peace Now group said.

Some 500,000 settlers and about 2.5 million Palestinians live in the West Bank and East Jerusalem, which Israel captured along with the Gaza Strip in the 1967 Middle East war.

(Writing by Maayan Lubell and Jeffrey Heller; editing by Mark Heinrich)