JERUSALEM - Former Prime Minister Ehud Barak announced on Sunday his much-anticipated return to politics, saying he will seek the leadership of the Labour party in the first step toward a possible bid for the country's highest office.

The announcement by Barak, 63, one of Israel's best-known figures, immediately shook up the race for the top spot in Labour, Prime Minister Ehud Olmert's main coalition partner. Labour primaries are set for May.

Barak spent nearly six years in political exile after he was crushed by Ariel Sharon in a 2001 election. The defeat followed a short and stormy tenure as prime minister that abruptly ended after failed efforts at making peace with Syria and the Palestinians.

The former army commando and chief of staff said he would run against the party's current leader, Defence Minister Amir Peretz, whose popularity has plummeted following Israel's inconclusive summer war with Hezbollah guerrillas in Lebanon.

Barak spent months laying the groundwork for a comeback, gaining the support of key members of the party and establishing himself as the early favourite.

Barak made his announcement in a brief letter to his party.

"The state of Israel, the army and the security establishment are experiencing a major shakeup,'' he wrote. "I believe that I possess the capabilities and talents necessary to serve as Israel's next defence minister.''

Barak served in wars and daring commando raids, becoming Israel's most-decorated soldier. He retired from the military in 1995 at the end of his term as chief of staff.

Joining the Labour party, he was quickly appointed to the cabinet. In 1999, he was elected prime minister, also serving as defence minister.

But his term lasted less than two years -- the shortest for an elected premier -- and he left office under stiff public criticism for his unilateral withdrawal from south Lebanon in 2000 and his offers of far-reaching concessions to the Palestinians and Syrians that failed to result in peace deals.

Barak will face a tough challenge for the party leadership from Ami Ayalon, another former general and one-time chief of the Shin Bet security service.

Ayalon said Barak's candidacy would allow "a clear choice between a return to the way of the past, which we know well, and a different type of politics of honesty, integrity and responsibility.''