Israeli Prime Minister Offers Prisoner Exchange and Hope of Renewed Middle East Peace Talks

The Israeli prime minister, Ehud Olmert, held out the rare possibility of a return to Middle East peace talks yesterday when he offered for the first time to release Palestinian prisoners in exchange for the return of a captured soldier.

In his most important policy speech since the Lebanon war, Mr Olmert said if the Palestinians halted violence and recognised Israel, there could be negotiations that culminated in the creation of a Palestinian state and an Israeli withdrawal from some of the occupied West Bank. His comments came on the second day of a ceasefire in Gaza.

Within hours, Palestinian militants fired two rockets from Gaza into Israel, underlining the fragility of the agreement, which went into effect on Sunday at dawn and only covers Gaza. Earlier in the day, Israeli troops killed two Palestinians in Qabatiya, in the West Bank, at least one of whom was a militant.

However, both sides appeared intent for the moment on maintaining the new ceasefire and working towards talks. Ismail Haniyeh, the Hamas prime minister, is due to leave Gaza today for the first time since taking power in March and will meet officials in Egypt, Iran and Syria and other Arab countries.

The US president, George Bush, is due in Amman, Jordan, later this week to discuss the Middle East as well as Iraq, and many believe his visit gave the final impetus to the ceasefire being agreed.

"I extend my hand in peace to our Palestinian neighbours, hoping that it will not be rejected," said Mr Olmert at a speech in Kibbutz Sde Boker to mark the anniversary of the death of Israel's founding prime minister, David Ben-Gurion. Many saw his comments as an attempt to rebuild his political credibility and policy agenda after the criticism his government faced in Israel following the Lebanon war.

Saeb Erekat, the chief Palestinian negotiator for President Mahmoud Abbas, welcomed Mr Olmert's words. "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 endgame," he said. Others from the Hamas government, however, were much more cautious.

Mr Olmert laid down many conditions before talks, and there are still several obstacles that stand in the way of what would be the first resumption of peace negotiations for six years.

The Israeli prime minister called on Palestinian militants to release Corporal Gilad Shalit, the soldier whose abduction in June triggered five months of violence in Gaza that claimed the lives of at least 375 Palestinians and five Israelis. He offered a prisoner exchange, a major about-face after promising for weeks he would not negotiate over the soldier's fate.

"I hereby declare that with Gilad Shalit's release and his return safe and sound to his family, the government will be willing to release many Palestinian prisoners, even those who have been sentenced to lengthy terms," he said. Despite the offer, negotiations to secure the soldier's release have stalled repeatedly. The Palestinians have pushed for the release of at least 1,000 prisoners, including important figures like Marwan Barghouti, who is serving five life sentences and whom the Israelis are reluctant to free.

Mr Olmert said that if a new Palestinian government was formed that met the criteria of the Quartet - the EU, UN, Russia and the US - he would meet President Abbas, also known as Abu Mazen. Israel has stopped its $60m (£31m) monthly tax revenue transfers and the Quartet has frozen direct funding to the Palestinian Authority since Hamas formed a government in March. Both demand that the Palestinian government recognise Israel, renounce violence and accept past peace deals, something Hamas has refused to do. Talks have continued for weeks to form a coalition unity government that might meet the criteria but they have repeatedly foundered.

"If a new Palestinian government is established - a government committed to the principles of the Quartet, implement the roadmap and bring about the release of Gilad Shalit - I will invite Abu Mazen to meet me immediately in order to conduct a real, open, genuine and serious dialogue between us," said Mr Olmert.

"In the framework of this dialogue, and in accordance with the roadmap, you will be able to establish an independent and viable Palestinian state."