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Outgoing Prime Minister Ehud Olmert warned on Friday that it would not be possible to reach a peace accord with the Palestinians if Israel did not cede part of Jerusalem to them.

"There won't be peace if part of Jerusalem does not become the capital of the Palestinian state," said Olmert, speaking at Kibbutz Yifat in the Galilee.

During Israeli-Palestinian peace talks that were relaunched in 2007, though are currently stalled, the Fatah-controlled Palestinian Authority demanded parts of Jerusalem as the capital of a future state.

The demand is highly contentious in Israel, with many rightist politicians stating their total opposition to any division of the city.

In a wide-ranging speech, Olmert also mentioned Israel's recent offensive against Hamas in Gaza.

He said that the Israel Defense Forces was continuing to operate in the South, and that the campaign was not yet over.

The prime minister's comments came after Palestinian militants in Gaza fired a mortar round into the western Negev on Friday. The attack caused no casualties.

On Thursday evening, Palestinian militants fired a Grad rocket that struck a synagogue in the southern town of Netivot, causing light damage to the building. The Israel Air Force retaliated shortly after the attack, striking four smuggling tunnels in the southern Gaza Strip, the army said.