Prime Minister Ehud Olmert responded to growing calls for his resignation Wednesday, telling council heads of Gaza area communities and Ashkelon, "someone under investigation doesn't necessarily have to resign."

"You can be sure that I have explanations for all the allegations against me, and every testimony will be refuted," Olmert said.

Olmert is suspected of having illegally received hundreds of thousands of dollars from Jewish American businessman Morris Talansky. On Tuesday, Talansky told a preliminary hearing at Jerusalem Magistrates Court that he gave Olmert $150,000 over a period of 15 years.

Olmert raised as evidence for his claims the testimony of his former driver, Avi Sherman, who was proven to have lied on television about details pertaining to the investigation. "They asked him ten questions on TV, but the polygraph proved he was lying in every answer," Olmert said. "I need to resign because someone said something against me? Every minute an investigation is launched and someone has to resign? If so, four prime ministers should have resigned in recent years."

Olmert also addressed the ongoing rocket fire from the Gaza Strip into the Gaza area communities, reiterating the sentiment that very soon a decision will be made regarding Israel's response to the situation.

Earlier Wednesday, Defense Minister Ehud Barak called on Prime Minister Ehud Olmert to leave his post or prepare for early elections, saying he did not believe the premier was capable of simultaneously leading the country and dealing with his personal matters.

"I do not think the prime minister can simultaneously run the government and deal with his own personal affair," Barak told a news conference at the Knesset press room in Jerusalem on Wednesday.

"Therefore, out of a sense of what is good for the country and in accordance with the proper norms, I think the prime minister must disconnect himself from the daily running of the government.

"He can do this in any of the ways available to him - suspension, vacation, resignation or declaring himself incapacitated. We will not be the ones to determine this," he added.

Barak held consultations with senior Labor Party officials before making the official press statement. He also met with Olmert himself at the end of a cabinet meeting Wednesday.

As Olmert's senior coalition partner, Labor's departure would leave the premier without a majority with which to rule.

Olmert has ridden out similar storms since taking office in early 2006 and Barak was less than clear on what steps he might take, and when.

Barak also stopped short of action that would immediately bring down the government and trigger an election that could backfire on him. Polls suggest the right-wing Likud under Benjamin Netanyahu would handily defeat Labor.

Livni: Israel has values and morals that bind its leaders

Foreign Minister Tzipi Livni said Wednesday that Israel's leaders are bound by the state's values and morals, referring to the corruption investigation.

Speaking in Jerusalem at a memorial service for David Raziel, the commander of the militant Zionist group that operated in Palestine between 1931 and 1948 Etzel, Livni said that "the state has a vision and values that obligate both its citizens and its leaders. Before we can a light onto others, it is only fitting that we work toward showing the light inside our home."

"There are morals that should be common to all of us and that represent unwritten norms and behavioral guidelines for everyone, whether poor or rich," she added.

Labor MKs move to dissolve the government Also in response to the calls for Olmert to step down, immediately after Barak's press conference, three Labor MKs - Shelly Yachimovich, Eitan Cabel and Ophir Pines-Paz - submitted a motion to dissolve the government. They said that their proposal was made with Barak's approval.

"Under the current situation, Olmert cannot continue in his post," said Pines-Paz. "If Kadima does not replace at one and create an alternative government, we will push forth a proposal to set an expedient and exact date for elections."

Cabel, the Labor faction whip, said that if Kadima does not put its house in order during the Knesset summer session, Labor would call for snap elections. "This is enough time for Kadima's internal dealings to be exhausted," he said.

Shas leader and Deputy Prime Minister Eli Yishai said that the early elections are closer than ever. "It is highly unlikely a new government could be formed with the current make-up of the Knesset," he said.

He also said that Shas is the only party that is not concerned about early elections.

Nationalist camp demands PM resign Likud MK Yisrael Katz called on Olmert to resign without delay and hold early elections, citing Barak's statements that Olmert is incapable of attending to Israel's diplomatic and security concerns.

National Religious Party-National Union MK Arieh Eldad said that Barak realized he could not carry on sailing aboard Olmert's sinking pirate ship.

"The earlier Israel rids itself of the shadow of shame cast on it by the envelope man and call early elections, the better," he said.

"The greenbacks in Talansky's envelopes were black [with filth]," said Eldad, who also serves as chairman of the Knesset caucus against corruption. "Black money bought the prime minister of Israel, and until Olmert is removed from his post, the black flag of corruption flies over the entire state of Israel."

Likud MK Limor Livnat said that Barak betrayed his national role, and failed to show public integrity.

"By not setting a deadline for the prime minister's departure, Labor proved weak," she said. "If there were any doubts, along came Talansky's testimony and proved that Ehud Olmert must go home immediately and we must have elections."

Earlier Wednesday, amid news reports that Barak would deliver the ultimatum to the prime minister, Labor legislator Danny Yatom said: "Either Olmert suspends himself or the Labor Party must leave the government."

Barak had been expected during the press conference to deny radio reports according to which he was considering forming an emergency government with the right-wing opposition Likud party that would leave out Olmert's centrist Kadima party.

Minister Benjamin Ben-Eliezer, a Labor Party veteran and Barak stalwart, said the defense minister had consulted "with nearly the entire Labor Party" regarding the faction's future in light of the Olmert probe. The minister said that party officials are not averse to early elections, adding that it would be difficult for Olmert to contend with state issues while embroiled in this affair.

"I would expect the prime minister would have his head 100 percent dedicated to the security problems of the state of Israel and wouldn't deal with anything else," Ben-Eliezer told Israel Radio.

Kadima MKs Amira Dotan and Ze'ev Elkin also demanded Wednesday that Olmert resign.

Coalition concerns Lawmakers from across the political spectrum began calls for Olmert's resignation and fresh elections nearly three weeks ago.

Labor Party officials said then that the faction would remain in Olmert's coalition government until a court ruling is made in the case.

Olmert has said he would resign if indicted but State Prosecutor Moshe Lador said it was too early to say if an indictment would be issued and that a decision would be made only after completion of police investigations.

Tal Silberstein, an Olmert adviser, told Army Radio on Wednesday that the prime minister had no intention of stepping aside now.

"I can tell you, based on a recent conversation with him, that he has no intention of announcing that he is taking a leave of absence or declaring anything at this stage - not as long as he is trying to prove his innocence," Silberstein said.

Knesset members lashed out at Olmert on Tuesday in response to Morris Talansky's testimony in the Jerusalem District Court.

Knesset Interior Committee Chairman Ophir Pines-Paz (Labor) said: "I do not understand how testimony like this jives with Olmert's statement that he did not take one shekel for his own pocket." Pines said Olmert's continued tenure was "insufferable and impossible."

Knesset State Control Committee Chairman Zevulun Orlev (National Union-National Religious Party) said: "A prime minister who asked for and received money in envelopes has lost his moral and public authority. Talansky's testimony is a serious public indictment against Ehud Olmert, and the coalition parties will be like partners in crime if they do not end his term immediately."

MK Ran Cohen (Meretz) said: "Despite our support for the diplomatic process Olmert is leading, if what Talansky says is true, Olmert cannot sit one more day in the prime minister's chair."