New legal woes raise questions on Olmert's future

By Dan Williams

JERUSALEM (Reuters) - An intensive new criminal investigation into Prime Minister Ehud Olmert's affairs has Israeli commentators questioning his political prospects at a crucial point in U.S.-led peacemaking with the Palestinians.

Already the focus of a series of corruption scandals in which he has denied any wrongdoing, Olmert was interrogated at short notice by police last week over fresh allegations barred from publication under a court gagging order.

Several pundits who say they have knowledge of the case believe Olmert could face pressure to step down on the eve of a visit by U.S. President George W. Bush to promote negotiations designed to yield a deal on Palestinian statehood by year's end.

"The matter under investigation is serious, there can be no doubt about that," wrote Nahum Barnea of Israel's biggest-selling newspaper Yedioth Ahronoth. "If it turns out that the allegations against Olmert are well-founded, he will have to resign his post, if not more than that."

Olmert said on Sunday he was staying on in office and cooperating fully with the investigation. He dismissed media reports on the gravity of his legal woes as "vicious rumours".

U.S. Secretary of State Condoleezza Rice, who met with Olmert in Jerusalem to prepare for a Bush visit expected to begin on May 13, declined to comment on the police investigation, describing it as "internal matters for Israel".

But U.S. officials have privately said they are taking this investigation seriously given its possible ramifications for a peace process that has already experienced significant setbacks.

A right-wing party quit Olmert's coalition government in January in protest at his peace efforts with the Palestinians. Some members of the centre-left Labour party, Olmert's junior partner, have accused him of jeopardising the peace talks by pursuing Jewish settlement projects in the occupied West Bank.