Olmert says full Israel-Palestinian deal not in reach

JERUSALEM (Reuters) - Prime Minister Ehud Olmert told parliament on Monday a full Israeli-Palestinian peace accord that includes Jerusalem was not within reach this year but said differences over borders and refugees were bridgeable.

U.S. President George W. Bush had urged both sides to sign a "peace treaty" before he leaves office in January, without offering details about what that deal should entail.

But Olmert, in remarks released by parliament after a closed-door hearing, said Jerusalem was too contentious an issue to be resolved this year and that Israel and the Palestinians should instead agree on a "mechanism" to tackle it in 2009.

Palestinian negotiator Saeb Erekat said Olmert's comments showed "Israel's determination to destroy the negotiations and the peace process".

Olmert, who this month said Israel and the Palestinians had never been so close to an agreement, has been talking up peace prospects as he clings to office in the face of a police investigation that could force him to step down.

Officials said Olmert envisaged agreeing a joint document this year with Palestinian President Mahmoud Abbas that sets out borders for a future Palestinian state, security arrangements and a way to deal with millions of Palestinian refugees. But the thorny issue of Jerusalem would be left out, they said.

"I do not see a viable possibility of reaching understandings on the issue of Jerusalem in the stated timeframe," Olmert was quoted by an official as saying.

"On the other three issues, I estimate that it would be possible to reach understandings by the end of the year, including the refugee issue," Olmert said, describing the gaps on borders, refugees and security as "not insurmountable".

Nabil Abu Rdainah, Abbas's spokesman, said Jerusalem was a "red line" for Palestinians, who want the city's Arab eastern half as the capital of their future state. "We will not accept any agreement that excludes Jerusalem," he added.

A senior Hamas leader in Gaza, Mahmoud al-Zahar, said Israel, backed by the United States, has no intention of giving Palestinians their "basic demands -- establishment of an independent state". He said that was why Hamas chose militancy.

JERUSALEM "MECHANISM"

Israeli officials said the joint document should refer to Jerusalem in the context of continuing talks rather than setting out how neighborhoods and holy sites would be controlled.

"Instead of letting the most difficult issues torpedo the entire process, we think it's important to find an agreed mechanism to keep discussing these issues into 2009," Olmert's spokesman, Mark Regev, said.

Olmert and Abbas launched U.S.-sponsored peace talks in November but these have been bogged down by disputes, mainly over Jewish settlement building in and around Jerusalem.

U.S. Secretary of State Condoleezza Rice will host a three-way meeting with Israeli and Palestinian negotiators in Washington later this week.

According to Palestinian and Western officials, Olmert has offered to return some 92.7 percent of the occupied West Bank, plus all of the Gaza Strip. Olmert has also proposed a 5.3 percent land swap for major settlement blocs which Israel wants to keep as part of any accord.

Abbas has demanded all of the West Bank and Gaza Strip, but officials say he may accept a 1.5-2 percent swap under which Palestinians would be compensated with land from Israel.

Olmert wants any agreement to address the refugee issue by saying that just as Israel is the homeland for the Jewish people, Palestine would be the homeland for the Palestinian people, officials said.

That formula effectively denies Palestinian refugees what they consider their right to return to their former homes in what became the state of Israel in 1948.

(Additional reporting by Avida Landau in Jerusalem; Mohammed Assadi in Ramallah; Editing by Alistair Lyon)