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Prime Minister Ehud Olmert said Monday that the situation in which Jews and Arabs live side by side in Jerusalem inevitably leads to terror attacks.

"Whoever thinks its possible to live with 270,000 Arabs in Jerusalem must take into account that there will be more bulldozers, more tractors, and more cars carrying out [terror] attacks," Olmert said, referring to two incidents this month in which Palestinian residents of East Jerusalem deliberately plowed bulldozers into passing cars in the capital, causing casualties.

Olmert added that in light of the volatile situation in Jerusalem, it was unlikely that Israel and the Palestinians would reach an agreement on the issue by the end of the year, as is the stated goal. He said that other core issues, such as the fate of the Palestinian refugees and the borders of a future Palestinian state, could be agreed upon by the year-end deadline.

"I don't believe that understandings that will include Jerusalem can be reached this year. But on the other core issues, the gaps are not insurmountable," he told members of the Knesset Foreign Affairs and Defense Committee, according to an official present at the meeting. "There is no practical chance of reaching an overall understanding on Jerusalem."

Palestinian negotiator Saeb Erekat said Olmert's comments showed "Israel's determination to destroy the negotiations and the peace process."

Olmert, who earlier this month said Israel and the Palestinians had never been so close to an agreement, has been talking up peace prospects as he clings to office in the face of a police investigation that could force him to step down.

Nabil Abu Rdainah, Abbas' spokesman, said Jerusalem was a "red line" for Palestinians, who want the city's Arab eastern half as the capital of their future state. "We will not accept any agreement that excludes Jerusalem," he added.

Israeli officials said the joint document Olmert envisages signing by the end of the year should refer to Jerusalem in the context of continuing negotiations, rather than delineating how the city's neighborhoods and holy sites would be controlled.

"Instead of letting the most difficult issues torpedo the entire process, we think it's important to find an agreed mechanism to keep discussing these issues into 2009," Olmert's spokesman, Mark Regev, said.

Olmert and Abbas launched U.S.-sponsored peace talks in November but these have been bogged down by disputes, mainly over Jewish settlement building in and around Jerusalem.

According to Palestinian and Western officials, Olmert has offered to return some 92.7 percent of the West Bank, plus all of the Gaza Strip.

Olmert has also proposed a 5.3 percent land swap for major settlement blocs which Israel wants to keep as part of any accord.

Abbas has demanded all of the West Bank and Gaza Strip, but officials say he may accept a 1.5-2 percent swap under which Palestinians would be compensated with land from Israel.

Olmert wants any agreement to address the refugee issue by saying that just as Israel is the homeland for the Jewish people, Palestine would be the homeland for the Palestinian people, officials said.

That formula effectively denies Palestinian refugees what they consider their right to return to their former homes in what became the state of Israel in 1948.

The West Bank and Gaza Strip constitute 22 percent of British Mandate Palestine.

They were captured by Israel from Jordan and Egypt in the 1967 Six-Day War.

Meanwhile, Palestinian sources said that U.S. Secretary of State Condoleezza Rice is pressuring Israel and the Palestinian Authority to try to agree on a document of understandings by September, ahead of the United Nations General Assembly.

The sources said Rice wants to be able to present the document during the General Assembly to show progress in the talks.

The document would include agreed-on points particularly on borders, an issue where, according to an American diplomat, the gap is not significant. According to Palestinian sources, the gap regarding a right of return for Palestinian refugees has also narrowed.

The United States is pressing for an agreement by which Palestinian refugees will have the right of return to what were the Palestinian territories before 1967, except for a yet-unclear small number of family reunifications. The PA says the U.S. will not take a dramatic step of a "Camp David" nature before the end of President George W. Bush's term in office.

A senior government official in Jerusalem confirmed that Rice wants to use the UN General Assembly to present a document summarizing the progress of the last nine months. "Rice brings up the idea in various diplomatic forums, both in the administration," he said.

The Israeli and PA teams, headed by Foreign Minister Tzipi Livni and Ahmed Qureia, are set to arrive in Washington on Wednesday to continue negotiations. Defense Minister Ehud Barak and Transportation Minister Shaul Mofaz were to join the Israeli delegation.

A three-way meeting with Rice is expected where she will be updated on the status of the talks. The United States and the PA have long been interested in holding such talks, but Israel says the meeting is routine.

According to the Israeli official, the main issue the Americans will bring up in the meeting is the document they hope to present at the General Assembly. But he added that "neither we nor the Palestinians want a deadline that can't be met. That will only hurt the talks and the good progress that has been achieved so far."

The official said gaps remain on most issues and confirmed that the parties are closest on borders. The debate now is over the percentage of land Israel will annex and the kind of compensation the PA will get in exchange. Olmert has told associates that the gap stands at a mere 2 to 3 percent.

The question of refugees is still open and the matter of Jerusalem has not even come up for discussion yet. Livni and Qureia meet at least once a week. Their advisers, Tal Becker and Saeb Erekat, also meet to work on draft agreements, and committees of experts are continuing their talks.

Livni and Qureia agree that talks should reach a point where they can survive changes of government on all sides, including in the United States. As opposed to Olmert and Abbas, who reiterate their desire to reach an agreement in 2008, Livni and Qureia are discussing ways to continue the talks through 2009. One idea is to use the November Moscow Conference on the Middle East to announce talks in 2009.