Israel's Olmert says ready for more risks for peace

NEW YORK (Reuters) - Israeli Prime Minister Ehud Olmert said on Sunday Israel would be prepared to take more risks for peace with the Palestinians now that President Mahmoud Abbas had formed a government without Hamas.

Promising to bolster Abbas, whose Fatah forces were routed by the Islamist Hamas group in the Gaza Strip, Olmert said:

"We will cooperate with this government. We will defreeze monies that we kept under our control because we didn't want these monies to be taken by Hamas to be used as part of a terrorist action."

Olmert, addressing American Jewish leaders on the first day of a three-day U.S. trip, said Israel could be working closer with the Palestinian government now.

"I personally believe that under the new circumstances, with a much greater cooperation between us and the Palestinian government, we can take perhaps more risks than we took in the past," he said.

Earlier, Olmert was deeply concerned with a rocket attack from Lebanon on northern Israel by what he said was apparently "a small Palestinian movement" that could be linked to al Qaeda.

"It's a very disturbing day," Olmert told reporters at a meeting with U.N. Secretary-General Ban Ki-moon at the New York home of Israel's U.N. ambassador.

In his remarks, Olmert pointedly stopped short of threatening any Israeli military response, saying the attack on the town of Kiryat Shmona "re-emphasizes the role of UNIFIL and Lebanon's army in southern Lebanon."

Both UNIFIL -- the U.N. Interim Force in Lebanon -- and the Lebanese army widened their deployment to keep the peace along the Israeli frontier after last year's war between Israel and Lebanon's Hezbollah guerrillas.

"Lebanon has been very quiet for the last nine months and hopefully will continue to be so," Olmert said.

BOLSTERING ABBAS

Israel has been withholding some $700 million in Palestinian tax revenues and said it could free up about $300 million to $400 million, with the rest tied up under court order to cover Palestinian debts to Israeli firms.

Olmert meets U.S. President George W. Bush in Washington for talks the Israeli leader said would focus on the new situation in the Palestinian territories and the possibility of a nuclear Iran.

In his speech to the Jewish leaders, Olmert called on moderate Arab countries, such as Saudi Arabia, to distance themselves from Hamas and encourage Palestinians to work toward peace under Abbas.

Olmert said he planned to hold regular meetings with Abbas -- the two men last spoke face-to-face in April -- to continue discussions on what the United States has dubbed a "political horizon" leading to a Palestinian state.

"We will be ready to talk to him seriously about the political horizon for what will eventually become the basis for a permanent agreement between us and the Palestinians," he said.

"We cannot let this opportunity slip away. We have to make an effort. If they will not reciprocate, of course it will not work."

"But we have to make every possible effort to work out from this turmoil a road that will lead us to a greater understanding and cooperation with those Palestinians -- and there are many -- with those who want to make peace."

Abbas seeks peace with Israel. Hamas has rejected Western demands to recognize the Jewish state and renounce violence.

(Additional reporting by Claudia Parsons)