Ehud Barak, the defence minister and a coalition ally, has demanded that Olmert resign, while Tzipi Livni, the foreign minister, challenged his party leadership amid an investigation over claims he unlawfully obtained money from a US financier.

A senior Israeli official told the AFP news agency on condition of anonymity: "It is obvious that there is no chance of reaching any agreement this year because Olmert is going. All the talks will be literally frozen for nearly a year."

Housing plans

Olmert on Sunday praised the plan to build an additional 763 housing units in Pisgat Zeev and 121 housing units for Har Homa settlement in Jabal Abu Ghneim.

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"We need to continue to strengthen Jerusalem as the capital of the state of Israel," he told his Kadima party.

A statement from Abbas's office called the proposals a "dangerous threat" to an area that the Palestinians hope will be the capital of any future state.

Olmert has vowed to keep West Bank settlement blocs, including enclaves near Jerusalem, under any future peace accord.

Yasser Abed Rabbo, a senior aide to Abbas, said on Sunday that Olmert's government "talks about peace while at the same time works on undermining the basis of peace by increasing settlement activity in Jerusalem and around it".

Little progress

When negoatitaions were resumed at Annapolis, Maryland, last year Olmert and Abbas pledged to try to reach a deal before Bush leaves the White House in January 2009.

But despite regular meetings the two sides have failed to achieve much tangible progress.

Olmert will meet George Bush, US president, in Washington to brief him on the talks as well indirect Turkish-mediated negotiations with Syria, which were announced in May after eight years without communication between the neighbours.

Olmert was also expected to discuss a military aid package that Bush offered during his visit to Israel earlier in May honouring 60 years since the country was created.