JERUSALEM - Prime Minister Ehud Olmert reached out to the Palestinians on Monday in one of his most conciliatory speeches yet, saying he was prepared to grant them a state, release desperately needed funds and free prisoners if they choose the path of peace.

Israel's Prime Minister Ehud Olmert looks through a pair of binoculars during a meeting with former Gaza Strip settlers near Avshalom, in the Negev Desert, November 27, 2006 in this picture released by the Israeli Government Press Office (GPO). [Reuters]

Olmert's remarks sealed a dramatic policy shift and built on a day-old truce meant to end five months of violence in the Gaza Strip. But new rocket attacks by Palestinian militants threatened the latest rapprochement.

"I hold out my hand in peace to our Palestinian neighbors in the hope that it won't be returned empty," Olmert said.

"We cannot change the past and we will not be able to bring back the victims on both sides of the borders," he said. "All that we can do today is stop additional tragedies."

Olmert appealed to the Palestinians to form a new, moderate Cabinet committed to carrying out a U.S.-backed peace plan and securing the release of a captured Israeli soldier.

Once such a government was established, Olmert said, he would call for an immediate meeting with the moderate Palestinian president, Mahmoud Abbas, "to have a real, open, honest, serious dialogue between us."

Palestinian legislator Saeb Erekat, a top Abbas aide, said the Palestinians were ready to negotiate a final peace deal.

"I believe Mr. Olmert knows he has a partner, and that is President Abbas. He knows that to achieve peace and security for all, we need to shoot for the end game," Erekat said.

But the Palestinian Cabinet, led by Hamas militants who reject Israel's right to exist, accused Olmert of posturing.

"This is a conspiracy. This is a new maneuver. Olmert is speaking about the Palestinian state without giving details about the borders," said Ghazi Hamad, a government spokesman.

Olmert's speech raised the diplomatic stakes ahead of President Bush's scheduled trip to neighboring Jordan this week for talks with Iraqi leaders.

Erekat said it was possible Abbas would meet with Bush there, but Israeli officials denied that Abbas and Olmert might meet on the sidelines of the Bush visit.

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