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Prime Minister Ehud Olmert has proposed to Palestinian Authority President Mahmoud Abbas that the "shelf agreement" the two sides are working on include an agreement for Israel to take in Palestinian refugees as part of "family unification."

Sources in Israel and the United States say Olmert proposed to Abbas that Israel absorb some 2,000 Palestinian refugees a year for 10 years, on a humanitarian basis and according to a formula to be determined in advance.

Their absorption would depend on all the other issues being resolved first, and on the Palestinians agreeing that there would not be a "right of return" to Israel and that most refugees would be absorbed in the future Palestinian state.

Foreign Minister Tzipi Livni, who is conducting parallel talks with the Palestinians' chief negotiator, Ahmed Qureia, is opposed to Israel's taking in any Palestinian refugees, and also refuses accepting them on the basis of family reunification.

Livni told U.S. President George W. Bush during his visit to Israel last January that allowing any refugees into Israel would set a dangerous precedent.

"It's like in a thriller, where you see the heroine open the door a crack and you know that the man with the knife is going to come in and stab her," Livni told Bush.

In her opinion, Israel must not compromise on letting in refugees, because that would be interpreted as an opening to exercising the "right of return."

Livni made it clear to the American administration that if the cabinet is presented with a memorandum of understanding that includes allowing refugees into Israel, she might vote against it. In the current political situation, Livni's opposition could scuttle the agreement if brought to a government vote.

Washington's position is that the refugee issue is a matter for the Israelis and Palestinians to discuss, but Bush might have a problem if Olmert brings for his government's approval an agreement unacceptable to most ministers.

Bush would have to decide whether to bless the agreement before it has been approved - and thereby enable Olmert to pressure ministers to support the agreement - or refrain from a sympathetic public response. This would signal to the Israeli cabinet that Olmert does not have the automatic backing of the American administration.

U.S. Secretary of State Condoleezza Rice is returning to the region next week, and wants an Israeli-Palestinian agreement - even a partial or watered-down one - before Bush's tenure ends. Olmert believes an agreement is still obtainable, and according to political sources close to the talks, the sides have shown more flexibility in recent weeks.