Tel Aviv  - Israel will have to withdraw from the territories it occupies, including East Jerusalem, if it wants peace with its Arab and Palestinian neighbours, outgoing Prime Minister Ehud Olmert said in an interview published Monday.

"We need to reach an agreement with the Palestinians, whose significance is a withdrawal from almost all the (occupied) territories, if not from all the territories, " he told the Yediot Ahronot daily in an interview to mark the Jewish new year, which begins Monday night, and to mark his own impending departure from office.

"We will retain a percentage of these territories," he added, "but we will have to give the Palestinians a similar percentage (of our territory) because without this there will be no peace," he added.

He said the Israeli withdrawal would have to include East Jerusalem, possibly the most sensitive issue in the ongoing Israeli- Palestinian peace talks.

The premier said however that any Israeli withdrawal would have to include "special solutions ... regrading the Temple Mount/Haram al- Sharif (compound) and the historic holy places."

"Whoever wants to hold on to the entire area of the city will have to include 270,000 Arabs into Israeli sovereignty. It won't work. We have to decide," he said, adding that the decision would be "difficult" and that it would go against "our natural instincts."

Palestinians are demanding that Israel withdraw from all the territory it captures from Jordan and Egypt in the 1967 Middle East War, to allow for the establishment of a Palestinian state.

Although Israel withdrew from the Gaza Strip in 2005, it controls the salient's borders, airspace and sea lanes.

In addition, Israel has always said that East Jerusalem, which contains sites holy to Judaism, Islam and Christianity, and which it also captured in the 1967 war, is part of an undivided Jerusalem, which it calls its "eternal" capital.

Palestinians want East Jerusalem as the capital of their future state. (dpa)