But the leaders agreed during their two-hour meeting to press ahead with negotiations that have been paralysed since Israel announced plans to build hundreds of new homes.
"We won't agree with the Palestinians on every issue on day one," Mark Regev, Olmert's spokesman, said after the meeting at Olmert's Jerusalem residence.
"The Palestinians have their positions. We have ours. And the commitment is to work to overcome gaps."
The meeting between Olmert and Abbas was their first since a US peace conference last month in Annapolis, Maryland, in which the leaders launched final-status negotiations with the goal of reaching a statehood agreement before George Bush, the US president, leaves office in January 2009.
Saeb Erekat, a Palestinian negotiator, said Abbas sought a halt to all settlement activity, including so-called natural growth, as spelled out in the long-stalled "road map" peace plan.
While Olmert agreed not to take any steps that might prejudice the outcome of the negotiations, he reiterated Israel's position on building within Har Homa, Regev said.
A senior Israeli official added: "The prime minister has not promised to freeze [housing] tenders that have already been published and are already under way."
Bush will visit the region early next month but it is unclear how Olmert and Abbas can bridge their differences.
Ahead of Bush's arrival, Israel is considering easing criteria for freeing Palestinian prisoners, a move one Israeli official said could pave the way for the release of uprising leader Marwan Barghouthi, seen as a possible successor to Abbas.
Easing Israeli restrictions on releasing prisoners was part of efforts to secure a swap deal with Hamas for captured Israeli soldier Gilad Shalit.
The Palestinians argue that the road map's explicit call for a halt to all settlement activity means all Israeli building on occupied land, including within Har Homa, is prohibited.
Israel has a different interpretation of the road map, arguing that construction within built-up areas of existing settlements is permissible as long as no new settlements are built and no additional occupied lands are confiscated.
Olmert told Abbas the Palestinians must meet their own road map commitments to rein in fighters in the West Bank and the Hamas-controlled Gaza Strip, a condition set by Israel for establishing a Palestinian state, officials said.
Palestinians see the building of Har Homa as the last rampart in a wall of settlements encircling Arab East Jerusalem, cutting it off from Bethlehem and the rest of the occupied West Bank.
They say it is a strategic move by Israel to pre-empt any possibility of East Jerusalem becoming the Palestinian capital.
Israel's Har Homa plan has also drawn rare criticism from the United States, Israel's key ally. Construction at the same settlement derailed a previous round of talks in 1997.