Prime Minister Ehud Olmert said Monday that despite the Palestinian Authority's declared suspension of peace talks over the weekend, negotiations with the Palestinian Authority would continue.

At the same time, Olmert said, Israeli forces would continue to strike hard at Hamas.

Speaking after the IDF's early morning withdrawal from the Gaza Strip on Monday, Olmert said that Israel would take further military action against militants firing rockets.

"We are in the midst of a combat action. What happened in recent days was not a one-time event," an Israeli official quoted Olmert as telling the Knesset Foreign Affairs and Defense Committee.

"The objective is reducing the rocket fire and weakening Hamas," Olmert said. The Israeli pullout ended a five-day-long offensive in which more than 100 Palestinians were killed.

Speaking to the Knesset Foreign Affairs and Defense Committee, Olmert said, "We must decide if we are interested in a serious peace process, or simply want to perfume ourselves with self-righteousness, causing Hamas to arise in the West Bank."

He said he government's policy will be to continue to strike at Hamas, "which is uninterested in any structure of understanding with us, and to continue with diplomatic negotiations with the Authority."

"The diplomatic horizon is what affords us the elementary right to self-defense," Olmert declared.

Referring to Israeli fears that Hamas will take over the West Bank as it did the Gaza Strip, Olmert added that "There is no way to prevent the process of Gaza'ization of the West Bank without proposing a diplomatic horizon."

"Whoever fails to see that, is simply lying to himself.

Meanwhile, senior Palestinian negotiator Saeb Erekat said that peace talks, which Washington hopes can result in a statehood deal this year, would remain frozen for now.

"We are working hard to reach a full calm, a full cessation of hostilities. We want to make sure that what happened will not reoccur," Erekat said.

Olmert to speak with Rice about Gaza action

Olmert will stress to U.S. Secretary of State Condoleezza Rice at their scheduled meeting in Jerusalem on Tuesday evening that Israel reserves the right to act freely in the Gaza Strip against Hamas and other Palestinian terror groups.

Olmert will also tell Rice that Israel is interested in continuing negotiations with moderate elements in the Palestinian Authority. In Olmert's view, Israeli military activity in Gaza in the past few days has got the message across that Hamas needs to rethink its strategy.

"Israel will not consent to the equation that Hamas wants to dictate in the Gaza Strip by firing on Ashkelon. We will be the ones to create the equation, not Hamas," he said at Sunday's weekly cabinet meeting.

That was also the main message to emerge from a consultation Olmert held Sunday with the defense and foreign ministers, IDF chief of staff, and heads of the Shin Bet and Mossad intelligence agencies.

For now, Olmert has instructed the defense establishment to maintain the current level of activity, which he feels has yet to be exhausted.

IDF military intelligence chief Amos Yadlin provided a broader perspective on the situation at Sunday's cabinet meeting.

"The fact that Iran, Syria and Hezbollah are not shooting now does not mean they are out of the battle," he said. "Everyone is watching to see how the conflict in Gaza will end, to decide how to act."

According to Yadlin, Hamas was pressured into deciding "that the situation is intolerable and that the siege must be broken and a different equation forged in the conflict with Israel."

Shin Bet chief Yuval Diskin suggested that Hamas wants calm in Gaza so that at a later stage it can take over the West Bank. Diskin added that "Hamas has a greater advantage in combat in the built-up area," which dictates the IDF's current modus operandi.

Diskin said Hamas was surprised by the intensity of Israel's response, and by the fact that even when it cut back its rocket fire, Israel continued to attack. He emphasized that Hamas can stop the rocket fire if it wants to.

"If Hamas understands that continued fire endangers its assets, it will try to arrange with the other organizations for the fire to stop," Diskin said.

IDF Chief of Staff Gabi Ashkenazi told the cabinet that the Palestinians are using civilians in rocket operations. "In one case we saw an old Palestinian man leave Jabalya with a wagon in which a Grad missile was concealed. He stopped, as though at random, beside an orchard, to which two gunmen came, took the missile, placed it on a launcher and launched it," Ashkenazi said.

In response to criticism from abroad that Israel is using excessive force in Gaza and killing civilians, Olmert said at the meeting: "Israel is defending its residents in the South, and with all due respect, nothing will prevent it from defending them, and no one has a right to preach to us for acting in self-defense."

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