Italian Prime Minister Romano Prodi on Wednesday called for direct talks between Prime Minister Ehud Olmert and Palestinian Authority Chairman Mahmoud Abbas.

"It is necessary to attempt a discussion on the exchange of prisoners," Prodi said at a joint news conference with Olmert, adding that he would raise the issue at a European Union summit this week.

Prodi has long said that small steps are needed to restart the peace process in the Middle East, and a prisoner exchange is seen by the Italian leader as one such step.

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As for an encounter between the Israeli and Palestinians, "I hope and will apply pressure so that that this meeting can happen soon," Prodi said. "Direct talks are extremely important."

In talks with Olmert at the Vatican on Wednesday, Pope Benedict XVI praised Israel for exercising restraint in the Gaza Strip as part of the cease-fire which began last month.

Olmert met with the Pope ahead of talks in Rome with Prodi and other senior officials, and asked him to urge Christians to protest Holocaust denials as the two met at the Vatican before talks with Italian Premier Romano Prodi, Israeli government officials said.

Olmert also invited Pope to visit Israel, and the pontiff replied
that he planned to go "when things calm down," the officials said.

This is the second leg of Olmert's European tour after a stop in Germany, the country that takes over the European Union presidency on January 1.

The agenda of the visit was expected to be dominated by the crisis in Lebanon, with Italy being the largest contributor to a United Nations peacekeeping force in the country, the stalled peace process with the Palestinians, as well as how to deal with Iran and Syria.

Israel and the Vatican established diplomatic relations in the 1990s, and the late Pope John Paul II played host to Israeli prime ministers and other officials as part of his effort to build ties with Israel.

A day before the audience, the Vatican issued a statement to remember the Holocaust in connection with a conference of Holocaust deniers taking place in Iran.

"The Shoah [Holocaust] was a great tragedy before which we cannot remain indifferent," the Vatican statement said. "The memory of those horrible events must remain as a warning for people's consciences".

Italy and Israel have cordial relations. Prodi has recently praised a November 27 policy speech by Olmert in which the Israeli premier appealed to the Palestinians to accept the international conditions and re-enter peace negotiations.

However, there are some differing views. Italy believes that Syria and Iran should be involved in any negotiations if the Middle East is to be stabilized. Israel refuses the prospect, as Olmert has reiterated in comments this week.

"I certainly think there are perspectives in Italian policy that don't mesh with ours. But there is a good basis for dialogue," Olmert told Israeli reporters on Tuesday.

Rome was also expected to discuss with Israel the fate of the Shabaa Farms, a disputed plot of land along the border of Israel, Syria and Lebanon. Prodi was to raise the prospects of putting the land under a temporary UN administration until the dispute is solved, said a diplomatic source close to the premier.

Prodi has been active in Middle East diplomatic efforts since he took over at the helm of a center-left government in May. He contributed 2,500 Italian troops to the UN peacekeeping force monitoring the cease-fire between Israel and Hezbollah militias after the conflict this summer in southern Lebanon.

The Italians are scheduled to take over command of the force from France in February.