Public radio reported that Prime Minister Ariel Sharon told parliamentary colleagues from his Likud party on Monday that the path should run to the east of the large Jewish settlement of Ariel, about 20km (12 miles) into Palestinian land.
"The fact that we are going to build to the east of Ariel does not prejudge the precise route," said Olmert, who is the official number two in Sharon's government.
Israeli media have reported that the Sharon government is considering a "breach" in the barrier around Ariel which would protected by a separate fence as well as heavily guarded by Israeli troops in a bid to allay US concerns.
The United States has expressed unease over a project which Israel insists is only intended to prevent attacks by Palestinian militants but is regarded by Palestinians as setting in stone the boundaries of any future two-state settlement.
Much of the planned 370-mile fence, 100 miles of which has already been built, cuts deep into the Palestinian territories.
Rebel pilots denounced
Meanwhile, Israeli Defence Minister Shaul Mofaz accused a group of pilots who have refused to take part in bombing raids over the Palestinian territories of deception, claiming they had never been given such orders.
"The petition of the refuseniks boosts the morale of the worst enemies of Israel"
Israeli Defence Minister
"Their refusal to obey orders which they have never been given ... it's all just for show and nothing else," Mofaz told the Israeli parliament.
The minister also denounced the group of 29 pilots, only a minority of whom are still in active service, of "cynically exploiting their pilots' uniforms to express a political opinion."
"The petition of the refuseniks boosts the morale of the worst enemies of Israel" he added.
The pilots have been grounded in the wake of the petition but Mofaz said they could resume service if "they retract and recognise their error."