Allegations state that when acting finance minister, Olmert intervened in the wording of the tender to benefit close business associates.
The Israeli prime minister insists he is certain of his innocence in the affair. But if the evidence is substantiated he could face charges of bribery, fraud and breach of trust.
Michael Eitan, a Likud member of the Knesset, said that there is no hiding from corruption in Israel.
"We've come up against a situation where people, even people of good will, don’t know where is right and where is wrong"
David Landau, Haaretz daily
"In Israel there are vigilant investigators, rule of law and public opinion that applaud investigations there is no immunity, anyone can see himself tomorrow or the next day interrogated by the police."
The allegations against the Olmert are the latest in a series of scandals that have convinced ordinary Israelis there is something rotten in the body politic.
Avraham Hirshson, Israel's finance minister, is under police investigation on suspicion of theft, fraud, conspiracy and money laundering.
The prime minister's personal secretary is under house arrest as part of a corruption probe.
The director of Israel's tax authority has suffered a similar fate after an extensive police investigation into officials accepting bribes in return for tax breaks.
Moshe Katsav, Israel's president, is facing allegations of rape and sexual assault, eavesdropping, fraud, breach of trust and improprieties in gift distribution.
In a recent Israeli poll, 85 per cent of the Israeli public believes their political leadership to be corrupt.
A leading newspaper described Israel as "mafia-like".
David Landau, editor-in-chief of the Israeli newspaper Haaretz, said: "We're basically still young country, a young democracy, and we've come up against a situation where people, even people of good will, don't know where is right and where is wrong.
"We're working it out, and it's an ugly, painful and bloody process, an there’s blood on many carpets."
|Katsav maintains he is innocent [EPA]|
Olmert's ruling Kadima party has plummeted in popularity, while according to a poll in Haaretz, the Likud party could easily win control of the government in a new vote.
Kadima was formed by former prime minister Ariel Sharon when he left Likud in 2005. Olmert took over after the popular Sharon was incapacitated by a stroke last year.
Support for Olmert has fallen after he was widely seen to have mishandled last summer's war against Hezbollah in Lebanon.
Only 14 percent of those polled said they were satisfied with Olmert.