In May, 1999, Benjamin Netanyahu was defeated by Ehud Barak in the elections for Prime Minister of Israel. Barak won by a margin of 56.08% to 43.92%. After losing the election, Netanyahu stepped down as leader of the right-wing Likud party and indicated a desire to leave public life at least temporarily.

After leaving office, Netanyahu and his wife Sara were investigated for possible financial fraud while Netanyahu was in office. Although it was suspected that he had accepted kickbacks and inappropriate gifts from various government contractors, the Israeli attorney general refused to prosecute Netanyahu, and he was cleared of all charges.

In December, 2000, after Ehud Barak resigned as Prime Minister, Netanyahu indicated a desire to run for office in the February special elections. The elections laws in Israel only allow current Knesset members to run for Prime Minister in special elections (those that are called when the current Prime Minister resigns). Since Netanyahu had resigned his Knesset seat, he was ineligible to run. Many people feel that Barak resigned to prevent Netanyahu from running against him in a special election, rather than allowing a regular election to take place.

Although the Knesset voted to modify the Israeli Constitution to allow Netanyahu to run, he then declined to seek election because the election held did not include Knesset elections. Netanyahu said "The reason is simple: in its current configuration, the Knesset is paralyzed -- you cannot rule with a Knesset like this." By refusing to run for Prime Minister, Netanyahu cleared the way for Ariel Sharon's candidacy. Ariel Sharon defeated Barak by a very large margin in the February 2001 special elections.

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