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Prime Minister Ehud Olmert told the Knesset Foreign Affairs and Defense Committee yesterday that Jews and Arabs living side by side in Jerusalem inevitably leads to terror attacks.

"Whoever thinks it's possible to live with 270,000 Arabs in Jerusalem must take into account that there will be more bulldozers, more trucks and the carrying out of [terror] attacks," Olmert said. He was referring to two incidents this month in which Palestinian residents of East Jerusalem deliberately plowed bulldozers into passing cars in the capital, killing three people in one incident.

Olmert added that in light of the volatile situation in Jerusalem, it was unlikely that Israel and the Palestinians would reach a full agreement on settling the claims to Jerusalem by the end of the year, as is the stated goal. But it would be possible to agree on a mechanism for handling the Jerusalem issue.

He said that other core issues, such as the fate of the Palestinian refugees, the borders of a future Palestinian state and security arrangements could be agreed on 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 said to members of the Foreign Affairs and Defense Committee, in what may be his last appearance before the committee as prime minister. "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 during a corruption investigation that could force him to step down.

Nabil Abu Rudeineh, Palestinian President Mahmoud 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," said Olmert's spokesman, Mark Regev.

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 to 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.