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Prime Minister Ehud Olmert is opposed to a large scale military operation in the Gaza Strip.

"It is highly advisable not to become entangled in operations and cost that are not in proportion to the pressures that we are facing," Olmert said yesterday, in an appearance before the Knesset Foreign Affairs and Defense Committee.

Olmert added that he does not downplay the gravity of the distress caused by the Qassam rockets, and that "if we think that we can do more, we will, but there is no need to get all fired up about it."

Olmert also declared that in the Gaza Strip "there is war, and Israel is conducting itself wisely. Hundreds of dead in the Gaza Strip among the militant organizations during the past year is not an insignificant price for the terrorist groups to pay. The public is not stupid, and it remembers that 2007 was the year with the least amount of terrorism in recent years.

"Israel is retaining its absolute freedom of operations in all matters pertaining to countering terrorism, in Judea and Samaria and the Gaza Strip. Wherever the likelihood of terrorism is identified, we take action, and Palestinian protests need to be rejected outright."

The prime minister also made clear that he is opposed to the establishment of two Palestinian states - a Hamas state in the Gaza Strip and a Fatah state in the West Bank.

"Two states mean one Jewish and one Palestinian state, and not three states for two peoples - one Jewish and two Palestinian. If Abu Mazen [PA President Mahmoud Abbas] was asked whether he would like to see the establishment of a temporary state without the Gaza Strip, I doubt he would respond in the affirmative."

The prime minister also briefed the Knesset committee on his talks with Abbas, saying it was agreed that no separate committees would be set up to discuss the core issues - borders, refugees, Jerusalem.

"We reached joint agreement that splitting the [talks] would not necessarily be beneficial," Olmert explained. "We preferred that the discussions on all subjects will be the direct responsibility of the heads of the teams, Abu Mazen and Abu Ala [Ahmed Qureia], and in every discussion the relevant experts would be included, depending on the topic of discussion."

Regarding recent tensions with Egypt over the crossing point at Rafah, Olmert said that "there is no particular wish to quarrel with Egypt, or to seek to chastise them in public. I think that sometimes it is correct to show restraint in public statements. There are certainly matters that require improvement and handling, and we will do this directly vis a vis the Egyptians."

Israel is not ruling out any options over Iran's bid to acquire nuclear capabilities, Olmert declared yesterday.

Olmert told the committee that Israel will not accept a situation in which the Islamic Republic possesses such weapons of mass destruction.

"Anything that could prevent Iran from possessing nuclear capabilities is within the legitimate context of the issue," Olmert said.

Defense Minister Ehud Barak tried to tone down Olmert's words, telling Labor members that declarations on the Iranian issue are not necessary. "Words do not stop missiles, and such declarations do not stop centrifuges," he said.

Olmert also met with members of his Kadima party yesterday and updated them on talks held last week during U.S. President George Bush's visit to Israel.

"Bush said things that were remarkably accurate and poignant," Olmert said. "He said Iran was a threat and is still a threat, and based on its patterns of behavior and its insistence on enriching uranium, it will continue to threaten the U.S. administration."