"If I Divide Thee, O Jerusalem..."

Ramon, a confidant of Olmert, spoke as Israeli and Palestinian negotiators were to begin intense talks in Jerusalem to work out a joint document they hope to issue at a U.S.-sponsored peace conference next month. The meetings were closed.

Ramon's proposal marked a potentially significant Israeli concession. Israel has annexed east Jerusalem and claims all of the city as its undivided capital. The Palestinians claim east Jerusalem, which Israel captured in the 1967 Mideast war, as capital of a future independent state.

But the Israeli transfer would not include the Old City and surrounding neighborhoods, Ramon said. These are the key disputed areas, since the Old City contains the holiest site in Judaism, the Temple Mount, and the third holiest site in Islam, the Al Aqsa mosque compound.

Ramon was not clear about what areas would be transferred to the Palestinians. But his opposition to relinquishing control of the Old City and neighboring areas with holy sites - known as the "holy basin" - falls short of Palestinian claims to all areas captured in the 1967 war.

"I agree that all the Palestinian neighborhoods except the Arab neighborhoods in the holy basin ... would be transferred," Ramon told Army Radio. Instead, he suggested a "special administration" be set up to oversee the holy basin. He did not elaborate, but past negotiations have raised the idea of turning oversight to an international body.

Palestinian negotiator Saeb Erekat refused to comment on Ramon's proposal, but said there have been no agreements on Jerusalem in preliminary talks so far. "We haven't started negotiations. It's premature to say anything about these issues," he said.

Olmert's office also tried to distance itself from Ramon, saying his comments reflected his own opinion and not that of the prime minister.

But Olmert said Monday that he strongly backed the efforts to work out a deal.

"By no means will I miss any opportunity for dialogue that might, perhaps - and I emphasize the word 'perhaps' - lead Israel in the direction of significantly improving its ties with the neighboring Palestinian people," Olmert told his Kadima Party ahead of a major address to parliament.

Ramon said he expected Olmert and his main coalition partners would support a deal on Jerusalem. Media reports say Olmert sent Ramon unofficially but that any deal he works out could be presented officially to the government for approval.

In Monday's negotiations, Israeli and Palestinian working teams were to begin work on a document outlining a joint vision for peace, which they hope to present at the U.S.-sponsored Mideast peace conference. The conference is expected to take place in Annapolis, Maryland, in late November.

After a series of one-on-one meetings in recent months, Olmert and Palestinian President Mahmoud Abbas appointed their negotiating teams to prepare for the conference.

Ramon said the talks leading up to the conference are integral for future Israeli-Palestinian relations. If the negotiations do not bear fruit, it will strengthen the Hamas militant group in its power struggle with Abbas, he warned. Hamas seized control of the Gaza Strip in June, while Abbas controls the West Bank.

"If we miss this opportunity, and it becomes clear that we can't reach an agreement even with leaders like Abbas or Prime Minister (Salam) Fayyad, this means we'll have to deal with Hamas," Ramon told Army Radio.

Cabinet minister Avigdor Lieberman, head of the hawkish Yisrael Beitenu, said the party supports Ramon's offer on Jerusalem as long as the Palestinians agree to let Israel maintain control of West Bank areas of Jewish settlement blocs. The Palestinians want a future state to include the West Bank, Gaza Strip and east Jerusalem.

"Within this framework, we are willing to exchange refugee camps that are in the Jerusalem municipal boundaries," Lieberman told Israel Radio.

Lieberman holds a popular Israeli view that the Jewish state must give up the outlying areas of Jerusalem, where tens of thousands of Palestinians live, in order to preserve a Jewish majority in the city.

In another apparent Israeli concession in the talks, Ramon said Israel would be willing to concede somewhat on its earlier refusal to allow Palestinian refugees to return to property they fled during fighting that lead to Israel's establishment in 1948.

Israel would in a "humanitarian gesture" consider permitting some Palestinian refugees to return to Israel, but not agree to a large-scale return, he said.

"There is no debate in Israel that Israel will not take responsibility for the fate of the Palestinian refugees," Ramon told Israel Radio. "If a Palestinian refugee asks us on the basis of sympathy and grace to return we will debate this and we will not rule this out."

Laying out his agenda for the coming year, Olmert said he planned to make every effort to pursue peace with the Palestinian president, Mahmoud Abbas, who is widely known as Abu Mazen.

"The current Palestinian leadership is not a terrorist leadership. President Abu Mazen and Prime Minister Salam Fayyad are committed to all the agreements signed with Israel, and I believe that they want to move ahead together with us on a route that will bring about a change in the reality of relations between us and them," he said.

Olmert said he would not use excuses to stall peace talks.

"I want to serve notice here, in the most resolute way possible, that I do not intend to look for excuses to block a diplomatic process," he said, in a speech occasionally interrupted by hisses from opposition lawmakers.