Key witness against Olmert cross-examined

JERUSALEM (Reuters) - Israeli Prime Minister Ehud Olmert's lawyers cross-examined on Thursday a U.S. businessman whose damaging portrait of a politician with his hand out for cash stands at the centre of a corruption case.

"I never gave a false answer," Morris Talansky said in the Jerusalem District Court about his questioning by police and his previous appearance on the witness stand in May.

Praising Olmert as someone worthy of support, Talansky, a New York-based fund-raiser for various Israeli organizations, had testified he had given $150,000 in cash-stuffed envelopes to the former Jerusalem mayor over a 15-year period.

Both Olmert and Talansky have denied any wrongdoing.

Olmert, who has been playing up prospects for peace with the Palestinians as he clings to office, has described the funds as legal contributions to election campaigns before he became prime minister in 2006. He has said he would resign if indicted.

Olmert's lawyers focused, at the start of what could be up to five days of questioning, on poking holes in Talansky's statements to investigators and his credibility.

One of the attorneys, Eli Zohar, played a tape recording showing that Talansky, despite his denials, had asked prosecutors whether they considered him a suspect.

The line of questioning seemed to be aimed at suggesting Talansky told investigators what they wanted to hear, in order to avoid any legal moves against him.

"I don't believe I invented stories," said Talansky, 75, adding that while he may not have remembered correctly some details of events, his accounts in general were accurate.

Zohar said the next court session, on Friday, "will deal with the issue of donations and expenses".

LEADERSHIP CHALLENGE

Olmert's party, Kadima, has begun the process of replacing him. It has scheduled a leadership election for September, under pressure from its main coalition partner, the Labour Party, to dump the embattled Olmert.

Speaking outside the courtroom, chief prosecutor Moshe Lador said he hoped a decision on whether to file charges against Olmert would be made soon, but gave no date.

Olmert has pledged to conduct the government's business as usual, despite the feeling among many Israelis that he will have to step down and speculation about a parliamentary election as early as November.

After talks in Paris on Sunday with Palestinian President Mahmoud Abbas, Olmert said a peace deal had never been closer. On a separate track, Israel and Syria have been holding indirect negotiations with Turkish mediation.

Amid deep public skepticism, Olmert and Abbas launched U.S.-sponsored statehood negotiations last year with the stated aim of achieving an agreement before President George W. Bush leaves office next January.

The talks have shown few signs of progress and Palestinian leaders have complained that Israeli settlement building in the occupied West Bank could wreck chances for a deal.

Last week, Olmert, who has been questioned three times by police, was stung by a new set of corruption allegations.

Police said they were investigating suspicions that Olmert made duplicate claims for overseas travel expenses while serving as Jerusalem's mayor and trade minister. His lawyers said he had done nothing wrong.

(Editing by Janet Lawrence)