Prime Minister Ehud Olmert told Quartet envoy Tony Blair on Tuesday that he will work with him directly and will be his personal contact in Israel.

The two met for two and a half hours Tuesday evening at the Prime Minister's Residence in Jerusalem. They had dinner in the company of their aides, and then spoke in private for an hour.

"We will provide you with all the necessary aid," Olmert told Blair, "this is a great challenge. We view the advancement of the issues for which you are responsible as of the utmost importance."

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They agreed to work in complete transparency and in full cooperation.

During their meeting, Olmert and Blair discussed the need to increase the financial cooperation between Israel and the Palestinian Authority, particularly within the private sectors in Israel and the West Bank.

Olmert said that Israel would act to improve the freedom of movement in the West Bank and allow transportation of goods to and from the area in order to put the Palestinian economy back on track.

Olmert and Blair emphasized the importance of garnering the support of moderate Arab countries to advance the formation of Palestinian state institutions.

Olmert emphasized that Israel believes that progress is possible with the current Palestinian leadership.

Blair urged Israel and the Palestinians on Tuesday to capitalize on the current atmosphere of opportunity, and made plans to set up a permanent office in the region to pursue his mission of laying the groundwork for Mideast peace.

Blair, who visited the region several times during his decade as Britain's prime minister, told the Palestinians his maiden trip as envoy for the Quartet of Mideast mediators was intended to gather input on the basis of which he would formulate his strategy, officials said.

Blair is to return in early September and hopes to have an office in place in Jerusalem for a full time staff. His spokesman said conversations about office space at a UN complex were at an early stage, and that Blair himself plans to spend about one week every month in the area.

"I think there is a sense of possibility, but whether that sense of possibility can be translated into something, that is something that needs to be worked at and thought about over time," Blair said after meeting President Shimon Peres on Tuesday.

Peres told Blair that he and Israel would work to help him in his mission as the Middle East envoy of the Quartet of peace brokers.

"Your success is our success; your dreams are our dreams. We will help you," Peres said a press conference following their talks in Jerusalem. "I feel there is a serious window of opportunity to advance peace. I don't know the duration of this opportunity, I am afraid it is not too long."

Blair has been tasked by the Quartet - the United States, European Union, United Nations and Russia - to prepare the foundations for a stable, economically strong West Bank government that could lead the Palestinians into statehood, but to leave the hard political issues at the core of the Arab-Israeli conflict alone.

But Palestinian leaders told him that politics cannot easily be separated from economics, officials said, speaking on condition of anonymity because they were not authorized to brief the media.

Palestinian Authority Chairman Mahmoud Abbas and his pro-Western prime minister, Salam Fayad, urged him to push a political agenda that would help restart direct talks with Israel on the core issues.

"What will make the requirement for peace at the end of the day will be the bilateral Israeli-Palestinian tracks," said Saeb Erekat, a Palestinian negotiator.

In his first public comments since arriving in the region Monday, Blair said he had come to listen, learn and reflect during two days of meetings with Israeli and Palestinian leaders.

Blair held talks on Monday with Foreign Minister Tzipi Livni, Defense Minister Ehud Barak and Vice Premier Haim Ramon.

Blair also met with the opposition leader, Likud Chairman Benjamin Netanyahu, in Jerusalem.

Netanyahu focused on the nuclear threat posed by Iran; Blair agreed that a nuclear Iran threatens regional and even world stability, but said that moving ahead with the peace process could counter Iran's nuclear ambitions.

"I hope that the advancing peace process can help create a coalition of moderate states against Iran," Blair told Netanyahu.

The Likud leader told Blair that the Palestinian Authority is weak and that the Palestinian public is divided between corruption and Islamic fundamentalism. Netanyahu said Hamas must be economically isolated and eventually taken down.