* Election puts centrist newcomer in strong position
* Netanyahu obliged to refocus on domestic issues
* Forging stable coalition could take weeks (Adds final results, Netanyahu talks to all possible partners)
By Alistair Lyon
JERUSALEM, Jan 24 (Reuters) - Israel's next government must heed voters and devote itself to bread-and-butter issues, not foreign policy problems such as Iran's nuclear plans and the Palestinian conflict, senior politicians said on Thursday.
Israelis worried about housing, prices and taxes reshaped parliament in Tuesday's national election, forcing Prime Minister Benjamin Netanyahu to woo their centrist champion as his main coalition partner.
Defence Minister Ehud Barak said voters had imposed new constraints on the next government. "It will be much more balanced, probably limited, cannot do whatever it wants and will have to take into account the growing pressure from within to focus on many internal issues," he told CNN.
Final election results that confirmed earlier projections were published on Thursday. They showed Yair Lapid, the surprise success of the ballot, stormed to second place with 19 seats in the 120-member assembly. Netanyahu's alliance of his Likud party and ultra-nationalists led by former Foreign Minister Avigdor Lieberman won 31 seats.
Formal coalition talks have yet to begin, but Netanyahu and Lapid held a long meeting on Thursday, a Likud statement said.
"The meeting, which lasted two and a half hours, was conducted in a very good atmosphere. Netanyahu and Lapid discussed the challenges facing the country and ways to grapple with them. They agreed to meet again soon," the statement said.
Netanyahu also held phone conversations with all the other possible coalition partners, a Likud spokeswoman added later.
Netanyahu has swiftly adopted chunks of Lapid's election platform as his own, keen to seal a deal that would create a solid base of 50 seats before drawing in other partners from the right or centre needed for a stable ruling majority.
Lapid, a former TV talk show host, said "colour had returned to the cheeks" of Israelis following the vote, adding that he was happy Netanyahu had now embraced his party's themes of "equal sharing of the burden" and helping the middle class, especially with housing and education.
"Equal sharing" is political code for meeting the complaints of secular tax-payers about the concessions given to the ultra-Orthodox, whose men study in Jewish seminaries, often on state stipends, and who are not drafted into the army.
Lulled by pre-election opinion polls, Netanyahu may have assumed he could coast back to power at the head of a right-wing coalition enthused by his mission to halt Iran's nuclear drive and eager to settle more Jews in the occupied West Bank.
But Likud and Lieberman's Yisrael Beitenu lost 11 of the seats they had won at the last election in 2009, punished by voters more preoccupied with problems of daily life.
Lieberman said he and Netanyahu shared with Lapid and Naftali Bennett, leader of a new far-right party, the goals of "equal burden, living costs and affordable housing".
But Lieberman told Army Radio that reaching a similar consensus on foreign policy might prove elusive. "We can start with diplomacy, but that will impair the government's functioning," he said. "This government must focus on domestic issues."
In its first reaction to the election, the United States, Israel's chief ally, renewed a call for resuming stalled peace talks with the Palestinians, but huge obstacles remain, even if the next Israeli government gains a more moderate flavour.
Yasser Abed Rabbo, a member of the PLO executive committee, said Palestinian leaders were watching for change after a vote that had given Israel a "new and different opportunity".
He told reporters any renewed talks must be based on creating a Palestinian state on the pre-1967 war lines.
"We are not ready to be part of the process of more political theatre or to give cover for government policy which represents the same policies as the last one, while settlements continue and we experience daily killing and repression."
U.S.-brokered peace talks broke down in 2010 amid mutual acrimony. Since then Israel has accelerated settlement construction in the West Bank and east Jerusalem - land the Palestinians want for their future state - much to the anger of Western partners.
Complicating Netanyahu's quest for a workable coalition is the difficulty of reconciling the demands of a dozen factions in parliament, where those on the right hold a razor-thin edge.
Lapid, who founded his Yesh Atid (There is a Future) party only a year ago, wants to end exemptions from military service for Israel's 10 percent minority of ultra-Orthodox Jews who also receive generous state benefits.
Those privileges were extracted from successive governments by religious parties such as Shas and the United Torah Party in exchange for their backing. The two parties have a combined total of 18 seats in parliament, and Netanyahu is likely to want to include at least one of them for a broad-based coalition.
He may also turn to the hardline Jewish Home group led by his former protege Bennett, a millionaire software entrepreneur, which won 12 seats. The Likud spokeswoman said Netanyahu congratulated Bennett in their phone conversation but other details were not revealed.
"Jewish Home can certainly be one of the desired partners in the new coalition," Likud lawmaker Zeev Elkin told Israel Radio.
However, Bennett has denounced the idea of Palestinian statehood and advocates annexing swathes of the West Bank, putting him at odds with Lapid, who wants "divorce" talks with the Palestinians to end the decades-old Middle East conflict.
The Labour party came third with 15 seats after putting economic and social issues at the forefront of its campaign, not the Middle East peacemaking it once championed. It has promised not to join any Netanyahu-led coalition.
Once the results are published officially on Jan. 30, President Shimon Peres will ask someone, almost certainly Netanyahu, to try to form a government, a process that may take several weeks. (Reporting by Jerusalem bureau; Editing by Giles Elgood and David Stamp)