Israel's January 22 election is expected to return Prime Minister Benjamin Netanyahu to office, giving him a fresh mandate to tackle stubborn foreign policy questions, such as Iran's nuclear ambitions, and domestic economic discontent.

The vote is expected to see Israel's parliament swing further to the right, whittling away at the chances of a comprehensive peace deal with the Palestinians and raising the prospect of greater diplomatic isolation for the Jewish state.

Domestically, Netanyahu's government will have to quickly pass a tough austerity budget to reduce the ballooning deficit, but also balance harsh measures against public anger over rising living costs and income disparity.

Netanyahu is not running unopposed, and has seen the Labour party hit him on economic issues, even as the hardline rightwing Jewish Home led by rising star Naftali Bennett condemns his support for a Palestinian state.

Polls show his rightwing Likud party, which is running on a joint list with the secular nationalist Yisrael Beitenu party, well ahead of its rivals, and surveys indicate Israelis consistently favour Netanyahu for the premiership.

He has campaigned on a term of relative economic stability, emphasising his military credentials, his tough line on Iran's nuclear programme and his decision to launch a punishing air campaign against Gaza militants last year.

But the shape of his future government remains unclear, along with how he will steer Israel on issues including settlement activity, peace talks with the Palestinians and Iran.

Labour has already ruled out joining the government, but Jewish Home -- projected to come third -- is expected to win a spot.

Netanyahu could opt for an exclusively rightwing line-up, or bring in one of the new centrist parties like HaTnuah headed by former foreign minister Tzipi Livni or Yesh Atid under former journalist Yair Lapid.

"I think he will try to invite everyone," said Efraim Inbar of the Begin-Sadat Centre for Strategic Studies. "The more parties in the coalition, the less he is subject to blackmail by one party or another."

Livni is believed to be open to joining the government, and could return to the foreign ministry, where she would be a moderate face for an otherwise hawkish administration.

She has campaigned on the need to renew peace talks with the Palestinians, which stalled in autumn 2010, with the new government likely to come under fresh pressure from Washington and Brussels to negotiate.

But some likely coalition partners, among them Bennett who opposes the creation of a Palestinian state, are certain to reject such a move and instead push for settlement expansion which could deepen Israel's diplomatic isolation.

Another key challenge will be Iran's nuclear programme, which Israel and much of the international community believes masks a weapons drive.

With moderates in Likud pushed aside in primaries, and his future coalition partners expected to be hawkish, speculation about a preemptive strike on Iran's nuclear facilities is likely to mount after the vote.

The Iran issue will probably put the spotlight on Netanyahu's frosty ties with US President Barack Obama, himself recently reelected, and commentators expect Netanyahu will have to prioritise mending them.

The new government will also need to keep a close eye on the unfolding Arab Spring, which has left Israel's borders with Egypt and Syria increasingly volatile, and threatened the country's few regional alliances.

Most Israelis, however, are more concerned with domestic issues than regional affairs, and see Netanyahu as the best leader on offer.

"There is a lack of leaders on the opposition side," Inbar said. "We see nobody in opposition who is material to be prime minister."