Amir Peretz has little political experience

Mr Peretz ousted veteran Shimon Peres, currently vice-prime minister in Mr Sharon's coalition, in a party vote.

The trade union leader, 53, has said he wants to pull Labour out of Mr Sharon's ruling coalition and contest elections.

Mr Peres, 82, complained of voting irregularities, but a Labour committee said the result would stand.

Mr Peretz won 42% of the vote compared with 40% for Mr Peres, prompting appeals from the former Nobel peace prize winner.

I'm one of the simple men in Israel and I want to work for the people of Israel and I want to change many things in Israel Amir Peretz Profile: Amir Peretz

Mr Peres' camp called the results "unreasonable, largely disproportionate", but there appears little chance of overturning the result.

The BBC's James Reynolds in Jerusalem says a meeting between Mr Sharon and Mr Peretz could be held as early as Sunday.

Coalition at risk

Speaking after visiting the grave of Yitzhak Rabin, the former Labour prime minister murdered 10 years ago, Mr Peretz criticised the coalition for not tackling social issues in Israel.

"I'm one of the simple men in Israel and I want to work for the people of Israel and I want to change many things in Israel," he said.

Correspondents say Mr Peretz's election could signal the end of Israel's coalition government.

LABOUR RESULTS Amir Peretz: 42.35 % Shimon Peres: 39.96 % Benjamin Ben Eliezer: 16.82% Profile: Shimon Peres

Mr Peres had taken Labour into government in January as a junior partner in a government headed by Likud Prime Minister Ariel Sharon.

Labour backed Mr Sharon's withdrawal from the Gaza Strip, a policy which had divided Likud and which Mr Sharon could not have pushed through without his junior partner's support.

Mr Peres wanted to continue in coalition until the next scheduled elections in November 2006, but Mr Peretz has said Labour should withdraw and work for early elections.

'Most important hour'

Mr Peretz heads Israel's main trade union organisation, Histadrut.

Born in Morocco, he is a populist, known for his walrus moustache, and at 53 comes from a different generation to Mr Peres.

"This can truly be Israel's most important hour," said Mr Peretz, as his supporters acclaimed his victory with chants of "the next prime minister".

"I expected a better evening," said Mr Peres, currently deputy prime minister in Mr Sharon's government.