Israel's Prime Minister Ehud Olmert attends a session in the Knesset, the Israeli parliament, in Jerusalem January 17, 2007. The resignation of Israel's armed forces chief over failure to win last summer's Lebanon war dealt a fresh blow on Wednesday to Olmert, already weakened by political scandal. [AP]

JERUSALEM - Prime Minister Ehud Olmert and Defense Minister Amir Peretz faced new calls to resign Wednesday after Israel's army chief stepped down, succumbing to widespread outrage over the handling of last summer's inconclusive war in Lebanon.

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Lt. Gen. Dan Halutz became the first Israeli chief of staff to resign since the 1973 war, but the government's political troubles may not end with his departure. With a government probe into the war looming, and a criminal investigation into Olmert's role in a banking deal, the prime minister's troubles appear likely to grow.

The Israeli public has largely blamed Halutz - along with Olmert and Peretz - for failing to crush Hezbollah guerrillas in Lebanon and halt Katyusha rocket attacks against civilians.

"Halutz's resignation is a positive and unavoidable move," said Ophir Pines-Paz, a member of Peretz's Labor Party. "But the political leadership also has to take responsibility."

Israel launched the war hours after Hezbollah guerrillas killed three Israeli soldiers and captured two others in a July 12 cross-border raid.

Critics say Olmert moved too hastily with a campaign that ended without achieving its declared aims - including the recovery of the two captured soldiers. Soldiers returning from the battlefield said they were poorly trained, lacked basic ammunition and food supplies, and received conflicting orders.

The prime minister, who is supported by a solid majority in parliament, is not expected to resign soon. But the uproar over the alleged mishandling of the war against Hezbollah could harm his chances to remain in office in the long term.

"It is not clear whether the prime minister will be able to survive the resignation of chief of staff Halutz and his own political problems," said Ephraim Inbar, a political scientist at Bar-Ilan University near Tel Aviv. "We may see pressure in his own party to replace him. This resignation is definitely the beginning of political turmoil in Israel."

Nearly 160 Israelis and more than 1,000 Lebanese died in the fighting, according to tallies by government agencies, humanitarian groups and The Associated Press.

The count includes 250 Hezbollah fighters that the group's leaders now say died during Israel's intense air, ground and sea bombardments in Lebanon. Israel has estimated its forces have killed 600 Hezbollah fighters.

Many Israelis criticized the army's inability to stop Hezbollah from firing nearly 4,000 rockets into northern Israel. Analysts say that failure has dealt a major blow to the army's prestige in the Arab world and its ability to deter attacks.

In Lebanon, Hezbollah legislator Hussein Haj Hassan called Halutz's resignation "the result of the defeat of the Israeli enemy in Lebanon." Demonstrators in Beirut, at their nightly anti-government protest, celebrated with fireworks when Halutz's resignation was announced.

In his first public comment since Halutz resigned, Peretz warned Israel's enemies, "Do not misinterpret the army chief's decision to resign as a sign of weakness." Speaking Wednesday evening in Haifa at a graduation ceremony for naval commanders, Peretz said Halutz's decision was "premature. I am sorry he won't be with us to complete the task" of restoring the army after the summer's war in Lebanon.

Peretz insisted that he would continue to guide the reforms - instead of resigning. Olmert and Peretz hoped to pick a new army chief within days.

Halutz stepped down after internal army inquiries found widespread problems in the military's performance. Halutz, a decorated former combat pilot, had previously defended the army's performance and rejected calls to resign.

Critics quickly clamored for the heads of the other wartime leaders, Olmert and Peretz.

"I believe the chief of staff took the right decision after the inquiries in the army. I think that now the question is about his superiors, the defense minister and prime minister," said Yossi Beilin, leader of the opposition Yahad party. "It will be very difficult for both of them to stay in power."

Olmert did not comment publicly about the resignation calls. "It's business as usual in the prime minister's office," said his spokeswoman, Miri Eisin.

But pressure on Olmert and Peretz could increase ahead of the release of a wide-ranging government probe into the war. The investigative panel, focusing on the performance of military and political leaders, is expected to announce its conclusions in the coming weeks.

Voicing popular sentiment, Uri Guralcky, 30 of Jerusalem, said Peretz and Olmert must accept responsibility for the war's failures. "They must go together with Halutz," he said.

A poll broadcast on Channel 10 TV backed that up. Asked whether Olmert should resign, 69 percent agreed. Eighty-five percent said Peretz should quit. The Smith Research poll, conducted by telephone, questioned 425 Israelis and had a margin of error of 4.8 percentage points.

Olmert's troubles were compounded by the announcement that police were opening a criminal probe into his role in the government's 2005 sale of a controlling stake in a bank. Olmert, then finance minister, is suspected of trying to rig the bidding.

An opinion poll published last week showed Olmert's approval rating at just 14 percent, and said his Kadima Party would lose if new elections were held. Peretz's public standing is equally dismal. The former union leader won the defense portfolio under a coalition deal despite his scant military experience. The war's flaws only cemented doubts about his fitness to serve as defense minister, and he now faces multiple challenges to his leadership within the Labor Party.