Prime Minister Ehud Olmert on Monday announced that he is a setting up a joint panel with the Palestinians to discuss the issue of a prisoners, a reference to ongoing negotiations on the release Israel Defense Forces soldier Gilad Shalit, snatched in June by militants linked to Hamas.

"In the coming days we intend to set up a joint committee with the Palestinians to discuss the issue of prisoners on the basis to make it possible to move forward," Olmert told a joint news conference with British Prime Minister Tony Blair, following their talks in Jerusalem.

But, he said, the release of Fatah leader Marwan Barghouti, who is serving five life sentences in an Israeli jail, is "not on the agenda."

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Olmert also said he hopes to meet Palestinian Authority Chairman Mahmoud Abbas "very soon," but did not elaborate.

He said that Israel is ready to release Palestinian funds it is holding for "humanitarian" purposes, but ruled out a large-scale transfer of funds to the Hamas-led government.

The international community has slapped economic sanctions on the Hamas government over its refusal to renounce violence, recognize Israel or abide by previously signed interim peace agreements.

Israel has itself withheld hundreds of millions of dollars of taxes it collects on behalf of the Palestinians since Hamas won legislative elections last January, though it has previously released small sums of money for health care and other humanitarian uses. Olmert did not specify when any new funds would be released or how the money might be spent.

Blair called on Hamas to accept the conditions laid down by the international community regarding Israel, saying that it was the only way for the ruling Palestinian government to "have a proper relationship" with the rest of the world.

"No one disputes Hamas won," Blair said referring to the January election in the Palestinian Authority, but added that the militant organization had to support democracy, and a two-state solution "if they want help."

He said the international community is ready to engage Syria "if Syria makes a choice to be constructive towards peace."

The strategic choices available to Damascus have been laid out very clearly, he said, adding that if Syria continues to support terror, it is refusing peace.

"If Syria makes a choice to be constructive for peace, to support democratic governments not undermine them, then we remain open of course to be constructive with them," Blair said.

On the subject of Iran, Blair said that it was clear that the Tehran regime does not support peace.

The British prime minister, in the region to push for a resuscitation of moribund Middle East peace talks, met earlier Monday with Abbas.

Blair praised Abbas' recent call for new elections, saying the next few weeks would be a critical time for the region, and called on the international community to support Abbas.

"Your people are suffering," he told Abbas. "We don't want anything to stand in the way of helping the Palestinian people."

Blair added that he would do what he can in coming weeks to deliver support to Abbas and the Palestinians. "I will not rest for a single moment," he said.

He hailed Abbas as "a leader of moderation and tolerance."

Abbas warned that the situation in the Palestinian territories was "dangerous" after a week of internal violence between warring Palestinian factions.

He also called for intensified international efforts to reach a permanent solution for the Arab-Israeli conflict, adding that he was ready to meet with Olmert.

"We need each other," Abbas said of Israel and the Palestinians. "We have a common issue and we must deal with each other to solve our problems."

Following his meeting in Ramallah, the British leader headed to Jerusalem for his meeting with Olmert. Ahead of the talks with his Israeli counterpart, Blair met with Foreign Minister Tzipi Livni and Defense Minister Amir Peretz in Jerusalem.

"If the international community really means what it says about supporting people who share the vision of a two-state solution, who are moderate, who are prepared to shoulder their responsibilities, then now is the time for the international community to respond," Blair told the news conference in Ramallah.

"I believe this is so critical and urgent over the coming weeks," Blair added.