Prime Minister Benjamin Netanyahu said in an interview aired on Channel 10 on Monday evening that peace negotiations with the Palestinians could result in an interim agreement.

"There could well be a situation that if we enter into talks with the Palestinians and we hit a wall on the issues of Jerusalem and refugees, the result would be an interim agreement," Netanyahu said. "That is certainly a possibility."

A spokesman for Palestinian President Mahmoud Abbas later rejected outright the possibility of an interim peace deal saying the matter of Jerusalem and refugees had to be resolved and could not be deferred to a later date.

"This is unacceptable to us, because it would exclude two vital issues, Jerusalem and the refugees. Jerusalem is a red line as it is to be the capital of a future Palestinian state ... going back to talk about a state without determining its borders is unacceptable, and it will not lead us to a true peace," Abbas aide Nabil Abu Rdaineh said.

Netanyahu was responding to a question about Foreign Minister Avigdor Lieberman's diplomatic plan for an interim agreement, which was reported on by Haaretz on Monday.

Lieberman has already presented the general outlines to Netanyahu and intends to give him the full plan soon. The foreign minister would like to see it approved by both the "septet" of seven key ministers and the diplomatic-security cabinet so that it can be presented to Washington in the coming months as Israel's official position.

A senior foreign ministry source said the plan, which Lieberman calls "Plan B," was drafted in response to the impasse in negotiations with the Palestinian Authority on a permanent-status agreement. Lieberman told an annual conference of Israeli ambassadors on Sunday that the plan is now undergoing final revisions, but is basically submission-ready.

Behind closed doors, Lieberman has said the plan is meant "to bring the peace process down to earth." He believes there is no chance of reaching a final-status agreement in the coming years, especially on the issues of Jerusalem and refugees.

"Even if we offered the Palestinians Tel Aviv and a retreat to the 1947 borders, they would find a reason not to sign a peace agreement," he said in his speech to the ambassadors on Sunday. "The PA has an illegitimate government that isn't holding elections. We must not reach a [final-status] agreement with them."

Also in Monday's interview with Channel 10, Netanyahu said that Israel was ready to express regret over the Gaza flotilla incident but that Israel would not apologize for the actions of its soldiers.