Israeli PM Olmert resigns

POLITICAL UNCERTAINTY: Olmert (pictured) has resigned as Israeli prime minister. (Getty Images)

Prime Minister Ehud Olmert announced his resignation on Sunday, but the political uncertainty gripping Israel and casting a shadow over US-backed Middle East peace talks is far from over.

"I have decided to end my functions as prime minister of the government of Israel," Olmert told a weekly cabinet meeting in Jerusalem, days after Foreign Minister Tzipi Livni was elected leader of their centrist Kadima party.

"I hope that Tzipi Livni will succeed in forming a national government with the composition she wants," Olmert said in remarks broadcast on television. "For my part I will help her with all my strength."

Olmert must still submit his resignation to President Shimon Peres, who will grant Livni 42 days to form a new government and avert snap general elections, which polls indicate would bring the right-wing Likud party to power.

Olmert is meanwhile likely to stay on as interim premier until a new government is sworn in, which could take several months.

The Kadima leadership result confirms Livni's meteoric rise to become the most powerful woman in Israel and could now see her follow in the footsteps of Golda Meir, the country's first woman prime minister.

The turmoil unleashed by several graft allegations dogging Olmert threatens to derail already sluggish US-backed peace talks with the Palestinians that were relaunched last November but have made little tangible progress since.

Olmert has been battling a wave of corruption allegations for several months, and on July 30 he said he would step down once a new leader was chosen in the unprecedented party vote.

As foreign minister, Livni has led negotiations with the Palestinians, which were formally relaunched 10 months ago with the stated goal of ending the decades-old conflict by the end of the year.

But the two sides remain deeply divided on core issues, including final borders, Jewish settlements in the West Bank, the future status of Jerusalem and the fate of some 4.6 million Palestinian refugees.

The negotiations could complicate Livni's efforts to form a new coalition, with the ultra-Orthodox Shas Party - a key partner in Olmert's administration - having vowed to quit the government if Jerusalem is even discussed.

Shas leader Eli Yishai also called for a big rise in family grants, something Livni has up to now rejected.

The Palestinians want mostly-Arab east Jerusalem, which Israel seized in the 1967 Six Day War, as the capital of their future state.

Israel, however, considers the entire city to be its "eternal, undivided" capital, a claim not recognised by the international community.

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