Israel's Olmert staying on after report: aides

By Rebecca Harrison and Ori Lewis

JERUSALEM (Reuters) - Ehud Olmert has told allies he will stay on as Israeli prime minister after an inquiry into the 2006 Lebanon war granted him a reprieve and removed an obstacle to U.S.-backed peace talks with the Palestinians.

An official in Olmert's office said on Thursday the prime minister would "continue to work" and would implement recommendations laid out by the government-appointed Winograd Commission on Israel's 2006 war against Hezbollah guerrillas.

Political allies said Olmert would not quit, and would soon try to build a broader coalition better placed to pursue talks aimed at sealing a deal on Palestinian statehood before U.S. President George W. Bush leaves office in a year.

"I was at his place last night. He said that even had the Winograd Commission been firmer in its criticism, he would not have stepped down," Yosef Lapid, former justice minister and Olmert confidant, told Reuters.

"But given the way it turned out -- certainly not."

Foreign Minister Tzipi Livni, who had urged him to quit over a scathing interim report in April on the war, said the government should "stay and fix" the faults, a political source said.

The Winograd Commission's final findings issued on Wednesday described "serious failings" by political and army leaders during the war, but did not blame Olmert personally. It endorsed key and controversial decisions he made.

Olmert's political rivals had been positioning themselves for a resignation that could have triggered an early election. But the report was widely regarded by commentators as a reprieve for the man who once described himself as "indestructible".

"The exoneration and the failure" was how Yedioth Ahronoth described the 500-page final report in a banner headline. One columnist said Olmert could "breathe a sigh of relief".

PEACE TALKS

Israel and the Palestinians agreed in November to restart peace talks after a seven-year hiatus but Olmert's fractious coalition and his own fragile political standing were regarded as hobbling the peace drive.

Palestinian negotiator Saeb Erekat voiced hope on Thursday the Winograd report would "clear the way for a meaningful peace process that would end the Israeli occupation".

The war battered Olmert's approval ratings. He has also been plagued by graft allegations, which he denies, and lost a rightist coalition ally this month over his peace moves.

Right-wing opposition leader Benjamin Netanyahu said "good and responsible leadership" could be restored in Israel only by early elections, which polls suggest his Likud party could win.

Defence Minister and Labour leader Ehud Barak, keen to distance himself from a government he joined about a year after the Lebanon war, was still pondering how to respond to the report, his deputy said. Few analysts believe he will bolt the coalition, a move that would likely bring down the government.