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JERUSALEM — Israel's election campaign has been thrown wide open by former Foreign Minister David Levy's plans to run for prime minister in next year's national elections.

Before thousands of supporters Monday, Levy formally announced that he is leaving Likud and setting up his own political movement.

Levy, 57, said last month he would secede from Likud after party leader Benjamin Netanyahu refused to compromise on the way Likud is to select its slate of candidates for the next Knesset.

The Moroccan-born Levy, alleging that the Likud's electoral procedures were biased against his supporters, said he would bolt from the party.

But his decision to vie for prime minister, and challenge the Likud party for Knesset seats, came as a surprise to some.

Levy's move, moreover, revealed an ongoing rift on the right that could dash Netanyahu's hopes for a head-to-head fight for the prime ministership with Labor's Yitzhak Rabin.

It also raised temperatures in the Israeli political arena at a time when accelerated progress in the peace process is already heightening tensions.

Under Israel's new election laws, which go into effect in November 1996 elections, individuals will cast two votes: for prime minister and for the party of their choice.

In the past, Israelis voted only for the party, with Knesset members chosen on the basis of the party's slate of candidates. The head of the victorious party automatically became prime minister.

Under the new rules, a prime ministerial candidate would need 50 percent of the vote to win on the first ballot. If no candidate receives 50 percent, a second round would be held between the two leading candidates.

Although Rabin is likely to be the only leftist candidate, hopefuls are crowding the right. Netanyahu has already been challenged by the leader of the staunchly right-wing Tsomet Party, Rafael Eitan, a former Israel Defense Force chief of staff with wide popularity.

Eitan was already expected to rob Netanyahu, who has been running ahead of Rabin in recent polls, of an outright first-round victory.

But now, with Levy entering the fray and other candidates looming, some observers speculate that Netanyahu's showing in the first round may be deeply eroded.

Indeed, powerful friends of the National Religious Party leader, Zevulun Hammer, are known to be urging him to run for prime minister — and arguing that he has could win.

Believed among Hammer's backers is Mexican Jewish millionaire Marcus Katz, a longtime supporter of national-religious causes in Israel who reportedly is prepared to contribute heavily to a Hammer challenge.

Others who might join the run for prime minister are the still-unelected leader of the nascent "Third Force" party, which opposes any Israeli withdrawal from the Golan Heights, and former Soviet refusenik Natan Sharansky, who has created a movement to address the needs of the country's recent immigrant population.

Katz is reportedly arguing that Eitan, Levy, the "Third Force" candidate and Sharansky would all sap Netanyahu's support, while all Orthodox and traditional voters would rally around Hammer.

Even if Hammer won by a slim margin, he would become the candidate to run against Rabin in the election's second round.

Then, presumably, all the other candidates, and the entire right wing in Israel, would unite around Hammer with the hope of ousting Rabin and defeating his land-for-peace policies.

Such calculations are, for the moment, fanciful speculation founded principally on the novelty of the reformed electoral system.

Meanwhile, Labor Knesset members did nothing to conceal their glee at Levy's break with the Likud.

"We like Levy," said Labor Knesset member Haggai Merom. "We like his constituency — people from the development towns and the outlying parts of the country."

His colleague, Eli Dayan, put it more bluntly.

"This is bad for them and good for us," he said.

Labor officials publicly said they would be glad to cooperate with Levy and his party in a new coalition to run the country after the elections.

Levy, a minister in every Israeli Cabinet from 1977 to 1992, is considered a relative moderate in Likud terms. Some Laborites have long regarded him as a potential ally.

Levy draws strong support at the municipal level, particularly in Galilee and Negev development towns populated by Sephardim.

Political observers say Levy's success in his new venture depends largely on the list of candidates he amasses.

Levy said he would not publish his candidate list for another year, leaving him time to approach a broad range of electorally attractive individuals and keep the public and rivals guessing.

Meanwhile, Levy, who was foreign minister from 1990 to 1992, is carefully refurbishing his image as a statesman who is familiar with the diplomatic arena and who represents firm but not extremist views.

Levy said his new movement would focus on social and economic issues. He placed himself in the political center, saying he would "not be dragged to extremes which imperil national unity."

He also lashed out at the Rabin government for what he called its "so-called peace policy." He called for suspending talks with Syria in light of the latest upsurge of violence in southern Lebanon, in which Hezbollah killed three soldiers.