Haim Ramon, a minister in the prime minister's office, said new elections were a "high" probability because he believed the next Kadima leader would find it difficult to form a new government otherwise.
Netanyahu could thwart Kadima's plans to form the next government by mustering a majority in parliament, either to form his own coalition or, as he has called for, to advance the elections scheduled for 2010.
Dogged by corruption scandals, Olmert thrust Israeli politics and Middle East peace talks into turmoil on Wednesday.
The 62-year-old has repeatedly denied any wrongdoing in connection to the claims that he received cash-stuffed envelopes from a US businessman, but he said he would step down in an announcement at his official residence in Jerusalem.
"I have decided I won't run in the Kadima movement primaries, nor do I intend to intervene in the elections.
"When a new [Kadima party] chairman is chosen, I will resign as prime minister to permit them to put together a new government swiftly and effectively."
Tzipi Livni, the Israeli foreign minister, is the main contender for Kadima's chief position.
But the transport minister, Shaul Mofaz, is closing the popularity gap.
Livni is Israel's chief negotiator with the Palestinians.
David Chater, Al Jazeera's correspondent in Jerusalem, said that if Kadima's next prime minister fails to keep the coalition government together, early elections will have to be called and this could have a direct impact on ongoing peace talks with the Palestinians.
It could take months for Olmert's successor to form a new coalition, leaving him in the role of caretaker prime minister, possibly into next year.
|An Olmert aide said he would still try to reach an agreement with Abbas [AFP]
Olmert could remain caretaker prime minister for 100 days after he resigns, Israeli officials said.
According to the Reuters news agency, sources close to Livni said she has agreed to continue talks with Palestinian negotiators, but they described her as increasingly reluctant to seal a deal that could be used by Netanyahu's campaign against her.
Israeli politicians and analysts have doubted Olmert's political will to make commitments, either in the final-status talks with Mahmoud Abbas, the Palestinian president, or in Israel's Turkish-brokered negotiations with Syria, over the status of the Golan Heights.
However, an Israeli official close to Olmert, said he would try to reach an agreement with Abbas "during the time he has left", either in his current role or as caretaker leader.
Abbas, speaking in Tunisia, pledged to work with Olmert and his successor despite the "turmoil" in Israel on Thursday.
Michael Oren, a historian at the Shalem Centre in Jerusalem, said Olmert's political weakness could be an opportunity for the Palestinians and Syrians to "achieve their maximum demands" in the negotiations.
But Gadi Wolfsfeld, a professor at Hebrew University, said: "Who is going to make a deal with him when they know he can't deliver? He is a lame duck."
Israeli sources have said Condoleezza Rice, the US secretary of state, is expected to visit Israel in mid-August for another round of trilateral talks aimed at showing the peace process remained on track.
For many Palestinians, however, Israeli governments come and go without ever bringing peace closer.
"All Israeli leaders are the same. Look, has anything happened since 1993?," lamented Abu al-Abed Abu Karsh, a 43-year-old merchant from Gaza City, referring to the Israeli-Palestinian Oslo peace accords of 1993.
|Livni, left, and Mofaz, right, are the main contenders to lead Kadima [AFP]
From the start, many Palestinians viewed Olmert's talk of a peace deal as little more than lip service to appease Israel's powerful allies in Washington.
"With or without Olmert, the negotiations have become futile," said Abdel-Rahim Mallouh, a senior official in Abbas's Palestine Liberation Organisation (PLO).
"Now the illusion of reaching a peace deal is fading away," said Hani al-Masri, a Palestinian political analyst.
Ahmed Qurei, head of the Palestinian negotiating team with Israel, told Al Jazeera that the they were negotiating with Israel as a whole, not as individuals.
"Whether he [Olmert] is still the prime minister for two days or two months, we will continue to deal with him.
"If someone else comes, we will deal with them, as long as they want to deal with us."
Mustafa Barghouthi, a member of the Palestinian Legislative Council (PLC), told Al Jazeera that Olmert's resignation was an admission that he has been a "failure as a prime minister".
"Everybody knows that there are several ministers who have similar problems [to Olmert], so the whole establishment is in trouble.
"I don't see a big difference between Livni, or [Deputy Prime Minister Ehud] Barak or Netanyahu. This is a whole establishment that has prevented the Palestinians from having their own state.
"The number of Israeli settlements has increased twentyfold [during Annapolis peace talks]; the number of checkpoints has increased from 521 to 607; The continuation of the building of the wall is creating an apartheid system and it is clear that neither Olmert nor anybody is is ready to discuss vital issues such as Jerusalem.
"The real question is whether Israel is ready to end their occupation."