Jerusalem - Israeli caretaker prime minister Ehud Olmert said Monday that Israel must cede parts of Jerusalem as part of a peace deal with the Palestinians.

"If we are determined to preserve the Jewish and democratic character of the State of Israel, we must inevitably relinquish, with great pain, parts of our homeland, of which we dreamt and for which we yearned and prayed for generations," Olmert told a memorial service on Jerusalem's Mount Herzl, marking 13 years according to the Hebrew calendar since the assassination of late Israeli premier Yitzhak Rabin.

"And we must relinquish Arab neighborhoods in Jerusalem and return to that territory which comprised the State of Israel until 1967, with the necessary amendments stemming from the realities created on ground," he added.

Olmert, who resigned late September amid corruption allegations and continues to head a transitional government until early elections are held on February 10, urged his future successor to avoid postponing a peace deal with the Palestinians.

Israeli Foreign Minister Tzipi Livni, the new leader of Olmert's centrist Kadima party, and former hawkish premier Benjamin Netanyahu of the opposition Likud party, are the two leading contenders.

"If, God forbid, we drag our feet, we might lose the support for the idea of two states. The alternative is incomprehensible. Everyone understands it," Olmert warned.

Referring to the Islamic Hamas movement, which refuses to recognize Israel, he urged: "A new regime may take control of the Palestinian territories and be radical and not open to the negotiation process."

"The moment of truth has come, and there is no escaping it. We can miss it, we can postpone it, at a heavy price, for many more years of bloodshed and unending agonies."

Addressing a special session of the Knesset, Israel's parliament, later Monday, Olmert vowed to continue peace negotiations with the Palestinians and Syria during his final months in office "as part of a genuine effort to reach an agreement, or at least establish its foundations, so that it cannot be evaded in the future."

He was defying critics who have protested that as a caretaker prime minister he lacks legitimacy to make binding concessions.

Those critics have included the opposition Likud, which is trying to push through a bill that would make it illegal for transitional governments to conduct peace negotiations.

But even Livni and Defence Minister Ehud Barak, of the coalition Labour Party, have argued that while he can continue talks according to their current format with the Palestinians and Syrians to keep the process going, it would be "immoral" for Olmert to sign any deals.

The White House admitted late last week that it was unlikely Israel and the Palestinians would meet their end-of-year deadline for reaching a peace deal. The negotiations with Syria, resumed in the spring for the first time since they broke off in 2000, are in their preliminary stage and held indirectly under Turkish mediation.

Although former premier Barak negotiated Jerusalem in the botched 2000 Camp David peace summit with late Palestinian leader Yasser Arafat, Olmert in a newspaper interview given earlier this autumn became the first Israeli premier to publicly state Israel should give up part of Jerusalem for peace.

He himself however has thus far declined to put Jerusalem on the table in his talks with Abbas, proposing instead to reach a deal that would postpone a settlement of the highly sensitive issue.

Abbas has rejected that offer, insisting on a "comprehensive agreement" that deals with all of the core issues of the Israeli- Palestinian conflict, including Jerusalem.

The Palestinians want East Jerusalem as the capital of their future state in the West Bank and Gaza Strip.

Rabin was assassinated on November 4, 1995 by a right-wing fanatic Jew opposed to his peace moves with the Palestinians. (dpa)