Prime Minister Ehud Olmert confirmed Wednesday that he intends to engage in negotiations with Palestinian Authority Chairman Mahmoud Abbas on the formation of a Palestinian state.

Olmert was responding to a Haaretz report, according to which he offered to hold negotiations toward an "Agreement of Principles" for the establishment of a Palestinian state comprised of the Gaza Strip and most of the West Bank.

In a press conference with President Shimon Peres, Olmert stressed that no timetable has been set for the negotiations.

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The prime minister added that there are "other quiet understandings" with the PA, in addition to the confidence-building measures Israel has taken. These include the release of prisoners affiliated with Abbas' Fatah movement, amnesty for wanted Fatah men and the transfer of withheld tax funds.

Olmert's proposal to Abbas is based on his view that it is important to first discuss issues that are relatively easy for the two sides to agree upon. The prime minister also believes that such an accord will enjoy the overwhelming support of the Israeli public and the Knesset.

"I resolve to create a track that will allow me to hold serious discussions with Abu Mazen," Olmert said in the press conference, referring to Abbas.

"Just so it's clear, [Abbas] carries full responsibility and he is ready to take a risk. There are risks for Israel as well, but we are strong enough to take that risk," he continued.

Referring to visits by the Egyptian and Jordanian foreign ministers, who are in Israel to promote the Arab League peace initiative, Olmert said he would not wait for them in order to pursue peace with the Palestinians.

"I want to start a political process with all my might, and to let things move forward. If it is appropriate for other states to help, like Saudi Arabia or the United Arab Emirates, we will welcome it, but we won't wait for them and sit inactively in order to start the process. We are the ones to lead and the ones to initiate, because we believe that progress on the peace process serves the interests of Israel."

If Olmert's proposal is accepted by the Palestinians, the two sides will begin negotiations on the characteristics of the Palestinian state, its official institutions, its economy, and the customs arrangement it will have with Israel.

After an "Agreement of Principles," the two sides will tackle the more sensitive diplomatic issues, like final borders and the transit arrangements.

Such agreement is believed to offer both Abbas and Olmert domestic political gains, and the Palestinian leader will be able to use it as part of his reelection campaign.

According to surveys, Olmert knows that the Israeli public is overwhelmingly supportive of a two-state solution, and that the current balance of power in the Knesset will allow him to rally a firm majority of 82 MKs behind such an agreement.

In the prime minister's view, this is not the time to deal with the minute details of the agreement, because it will be very difficult to reach agreement on final status issues, such as borders, Jerusalem and the refugees.

These, Olmert proposes, should be left to the end of the negotiations. Olmert would like to reach an agreement on principles, and then proceed to more difficult issues. This way, the prime minister claims, it will be possible to restart the peace process, despite the weakness of the Palestinian Authority, and the skepticism regarding its ability to keep its part of the agreement and guarantee security.

The likely principles that Olmert will offer as part of the the agreement will be the establishment of a Palestinian state comprising about 90 percent of the territory of the West Bank and in the Gaza Strip.

Even prior to the 2006 elections, Olmert suggested that Israel unilaterally evacuate from such territory in the West Bank, and withdraw to the separation fence, for the primary purpose of retaining a Jewish majority in its territory, behind a defensible border.

Palestinian support for such agreement will contribute to Israeli public and political support for the deal.

*Exchange of territory to compensate for the large settlement blocs that will remain under Israeli control in the West Bank.

*Connecting the West Bank and the Gaza Strip through a tunnel in order to offer the Palestinians territorial contiguity, prevent friction between Israelis and Palestinians, and preserve security.

Israel will request territorial compensation for the digging of a tunnel in its sovereign territory. From Israel's point of view, a tunnel connecting the West Bank and the Strip is the best option to link the two, and is better than the elevated or sunken highway proposals.

*The Palestinians will be able to declare Jerusalem their capital. In the past Olmert has hinted that he would be willing to withdraw from the Arab neighborhoods of East Jerusalem "on the edge," which have never been considered part of the historical city.

The Old City, its environs and the Mount of Olives would remain in Israel's control.

The prime minister initiated discussions on the political vision during his recent meetings with Abbas. The goals and the framework of the negotiations was also discussed during the routine meetings between Olmert's senior aides, Yoram Turbowicz and Shalom Turjeman and their Palestinian counterparts, Rafik Huseini and Saeb Erekat.

Olmert turned down the proposal of Secretary of State Condoleezza Rice for a "shelf agreement," which would be a complete final status agreement, negotiated by the U.S., whose implementation would be postponed.

The prime minister explained that he is concerned that the PA will be unable to implement the agreement.

Olmert is also worried that such a plan would be used as the starting points for further negotiations, as happened to the proposals of Prime Minister Ehud Barak at Camp David in 2000, and the Clinton Plan, that are now seen by the international community as the basis to any future agreement.