In a letter to Shas legislators, Deri wrote, "I prayed that my resignation from the Knesset would help achieve national appeasement and greater unity."

He added that after having consulted "all rabbis," he decided to resign from all his responsibilities in Shas in order not to be "even a symbolic impediment."

Outgoing Labor Minister Eliyahu Yishai later said the Shas legislators did not accept the resignation. They instead went to the party's spiritual leader, Rabbi Ovadia Yosef, in hopes of reversing the decision.

Deri, who has already resigned from the Knesset, was sentenced in April to four years in jail on charges of bribe-taking, fraud and breach of the public trust. A Jerusalem court recently stayed his sentence, pending an appeal to the Supreme Court.

After Deri's dramatic announcement, Labor/One Israel said it would take a 24-hour break to assess the situation before coalition talks continue.

"This is to prevent the appearance of under the table dealings," a confidante of Barak said.

Deri's resignation paves the way for Barak to establish a coalition of at least 70 Knesset members. The most likely make-up of the government will be Labor/One Israel (26 seats), Shas (17), Meretz (10), Yisrael Ba'aliya (6), the Center Party (6), and the National Religious Party (5).

Deri, who is 40, burst onto the political scene 15 years ago, turning Shas into a political power that served in both Labor and Likud governments. In last month's elections, Shas increased its Knesset representation to 17 seats from 10 seats in the previous legislature, making it the third largest Knesset faction after Labor and Likud.

A day after the elections, Deri announced that he was retiring from political life. But questions have remained as to whether he would continue to direct Shas policies from behind the scenes.

On Tuesday night, Deri appeared before some 10,000 supporters in Tel Aviv's Yad Eliahu stadium. In his speech, he avoided making political references and called for unity across the religious divide. "We're all brothers…We've all got to dedicate ourselves to unity," he said.

The secular Meretz Party, which has stipulated that Deri withdraw completely from Shas activities before it would join a government that includes Shas, was planning to meet this week to decide how to respond to Deri's announcement.

Another secular party, Shinui, has vowed to stay out of a coalition that includes Shas or any other fervently religious party.

At the same time, Shinui leader Yosef "Tommy" Lapid said this week that his party is days away from signing a coalition agreement with Barak. A source close to Lapid noted that he has lowered his expectations, and no longer believes he will be appointed justice minister.

Even if Meretz agrees to join a coalition that also includes Shas, coalition negotiations are still likely to be difficult over the issue of how cabinet portfolios are distributed.

Shas is demanding four portfolios, "two of them senior ministries," according to Yishai. Barak reportedly intends to offer to Shas only three: labor, tourism and science.

Shas also seeks to retain its control over the powerful Interior Ministry, which is being sought by the immigrants rights Yisrael Ba'Aliyah, another potential coalition partner.

This week, Barak also began to talk concretely about handing out cabinet positions, moving closer to nailing down the composition of his government.

National Religious Party leader Yitzhak Levy, who until now had insisted on retaining the Education Ministry as a condition for joining the government, said Monday he acknowledges the NRP will most likely not be given that portfolio and will make do with a newly expanded Transportation Ministry.

Barak also met this week with the Center Party's Amnon Lipkin Shahak — who is not expected to be offered a ministerial post but who may be offered another senior position.

Apparently, Barak does not intend to expand the number of cabinet seats from 18 to 24. This creates a situation in which Barak, although he may want to give as many ministries as possible to Labor/One Israel Knesset members, will end up having only eight or nine to offer.

These will have to go to Gesher leader David Levy, Labor's No. 2 man Shimon Peres, a Meimad representative and Barak himself — leaving only three to five seats to be fought over by the many contenders.