Anywhere in the world where there are two peoples and two religions, whether it's the former Yugoslavia or the Caucasus region in Russia or in Northern Ireland, there is conflict," Lieberman told the British newspaper the Sunday Telegraph. "What we have seen in Cyprus is that since they have that model, there is no terror. There is security. There is no peace but there is security."

Cyprus has been divided into Greek and Turkish sections since 1974. Repeated attempts by the United Nations to reunify the Mediterranean island have failed.

Prime Minister Ehud Olmert distanced himself from Lieberman's remarks during Sunday's cabinet meeting.

Yuli Tamir
Photo: Ariel Jerozolimski

"Lieberman's opinions do not reflect mine. That's not the government's position and Avigdor [Lieberman] knows that. I am in favor of Arab citizens having equal rights and I never hid that. So long as I am prime minister this will be the policy of the State of Israel," Olmert said.

Last week, Olmert brought Lieberman's Israel Beiteinu Party into the coalition, to the concern of many who feared that Lieberman's hawkish views would hamper peace initiatives with the Palestinians. Since joining the government, Lieberman has made a number of controversial statements, including a comment during last week's cabinet meeting that in regards to the Palestinians, Israel should adopt Russia's tactics in Chechnya.

While the previous comments have not elicited much of a response among Lieberman's coalition partners, the Labor Party slammed Lieberman's Sunday remarks and called for an inquiry into Lieberman's ability to serve in the cabinet.

"His statements are unacceptable and completely offensive. I hope the prime minister conducts a thorough inquiry into this matter," said Tourism Minister Isaac Herzog (Labor).

Education Minister Yuli Tamir (Labor) denounced Lieberman for taking an "anti-Arab" stance since he became minister.

"A democratic state in general, and a Jewish state in particular, must allow room for minorities within it, and must make every effort to make them equal partners," said Tamir.

Lieberman's inclusion in the coalition prompted a crisis in the Labor Party over its participation in the government. Minister of Culture and Sports Ophir Paz-Pines quit his position in the cabinet over Lieberman's inclusion, and several MKs from the party's Arab Faction have launched protests of the Israel Beiteinu Party.

Following a last minute compromise with the government, Defense Minister and Labor Chairman Amir Peretz agreed to support Lieberman in the coalition. Peretz's relations with the Minister of Strategic Threats remain strained however, and he has warned Lieberman to "stay away" from the defense ministry.

Responding to Lieberman's comments, Peretz said that his party would "not tolerate racism and ideas of transfer against our Arab minority."

Speaking to Labor party activists at a memorial for former prime minister Yitzhak Rabin at the Labor's Tel Aviv headquarters, Peretz added that "even a minister who wants to spur discord will not be allowed to succeed."

Later on Sunday, Lieberman told Army Radio that Hamas officials would pay with their lives if captured IDF soldier Gilad Shalit was not returned to Israel immediately.

"If the soldier is not returned immediately, [Palestinian Prime Minister] Ismail Haniyeh and [Foreign Minister] Mahmoud Zahar can join the company of the shahids," Lieberman said, using the name given to suicide bombers.

Peretz reacted to Lieberman's threats with outrage, saying it was not Lieberman's place to issue threats and that "these words cause unnecessary agitation. The government needs to censure them."

Since Israel Beiteinu joined the government, the loudest criticism has come from the Arab Parties, who renewed their condemnations Sunday by calling Lieberman's most recent comments a "call for ethnic cleansing."

"These comments prove that the practical meaning of a Jewish State fluctuates between discrimination and expelling the Arab citizens. We were here long before Lieberman the immigrant. We are the salt of the earth and he is an invader," said MK Ahmed Tibi (Ra'am- Ta'al).

MK Dov Henin (Hadash) called for the immediate dismissal of Lieberman from the government due to Israel Beiteinu leader's "constant racist comments."

The only MK to issue a statement in support of Lieberman was MK Uri Ariel, the Chairman of the NU-NRP faction, who called Lieberman's remarks "correct and justified."

According to The Abraham Fund, an NGO seeking to strengthen coexistence, "Lieberman's ideas are dangerous and anti-democratic. They not only contradict the principles of Israel's Declaration of Independence, but also the coalition guidelines of Israel's current and all previous governments. Full and equitable citizenship for Israel's Arab citizens is unconditional and non-negotiable and will not be a pawn in any future settlement between Israel and the Palestinian people."

"Lieberman's claim that separation between Jews and Arabs will lead to social stability is unfounded, as ethnic separation has radicalized and perpetuated conflicts," a statement released by the organization stated.

Gil Hoffman contributed to this report.