Israel marks 60 years as police probe Olmert

JERUSALEM (Reuters) - Israel celebrated its 60th birthday with barbecues and military display on Thursday but the party was marred when police announced they were investigating whether the prime minister had taken massive bribes.

Ehud Olmert said in a late-night televised statement that he had taken cash for a decade from an American businessman but insisted they were legitimate campaign donations and refused to resign unless the attorney general indicted him.

Doubts over his future could derail U.S.-backed efforts for a peace deal with the Palestinians already beset by squabbles over Jewish settlements and violence in the Gaza Strip.

"I never took bribes. I never took a penny for myself," said Olmert, who is due to welcome U.S. President George W. Bush to anniversary celebrations next week.

Details of the probe, hushed up for a week by a media gag order, emerged after a day of rejoicing.

Fighter planes had traced "60" in smoke trails across the sky, paratroopers dropped into the sea and a youth Bible quiz highlighted the place Jewish faith holds in a state mainly founded by secular Zionists.

War or the threat of it has clouded every day for Israelis since 1948 when David Ben-Gurion declared the state that was destined to be a haven for survivors of the Nazi Holocaust.

On Thursday, blue-on-white Star of David flags fluttered from cars and rooftops, and families gathered to focus on the positive. "It's an emotional day," said Tzviya Gilboa, 57, among vast crowds packing sunny beaches at Tel Aviv. "Anything that is connected to Israel is exciting to me."

Hours before police announced prosecutors were investigating whether Olmert took "significant sums" in illegal payments from one or more foreigners, the prime minister said God had "fulfilled his promise" to the Jewish state in its 60th year.

"We, the descendants of Abraham, have inherited the land, we have filled it, we have made the desert bloom, built and made it glorious," he said. "The spirit of sacrifice still beats within us and is still sadly setting us trials that are hard to bear."

BUSH VISIT

The scandal will cloud next week's visit by Bush, Israel's most important ally and chief sponsor of peace talks launched six months ago.

Security was intense for Thursday's celebrations for fear of attacks and measures were tightened to stop Palestinians entering Israel from Gaza and the West Bank -- areas Palestinian President Mahmoud Abbas wants for a future state.

Six Islamic Jihad militants were wounded in an Israeli air strike in the Hamas-controlled Gaza Strip, medical staff said.

While Israelis partied, Palestinians held a solemn march in Bethlehem to mark the "nakba", or catastrophe, of the Jewish state's creation, when about 700,000 people, half the Arab population of Palestine, fled or were driven from their homes.

Holding banners vowing never to give up their "right to return" to land now part of Israel, protesters rallied around a 10-metre-long key, a symbol of the dream to reclaim lost homes.

"It hurts me dreadfully to see Israel celebrating because of our suffering, our expulsion and the loss of our homeland," said Monther Amireh, as Israeli planes roared overhead.

In northern Israel, thousands wearing black armbands and waving Palestinian flags rallied at a site where an Arab village once stood. It is now a Roman-era archaeological site.

Olmert has already been the focus of a series of corruption scandals in which he has denied any wrongdoing.

Washington said earlier Olmert was a "very important" player in the peace process but noted he was not Israel's only representative. If he did step down, Foreign Minister Tzipi Livni, who leads Israel's negotiating team, is seen as the likeliest successor to Olmert within his Kadima party.

(Additional reporting by Alastair Macdonald, Joseph Nasr, Adam Entous and Brenda Gazzar in Jerusalem, Avida Landau and Ari Rabinovitch in Tel Aviv and Mohammed Assadi in Bethlehem, edited by Richard Meares)

For multimedia coverage of Israel's anniversary visit: here