JERUSALEM, Nov 27: Prime Minister Ehud Olmert reached out to the Palestinians on Monday in one of his most conciliatory speeches yet, saying that he was prepared to grant them a state, release desperately needed funds and free prisoners if they choose the path of peace.

Olmert's remarks built on a day-old truce meant to end five months of violence in the Gaza Strip. But new rocket attacks by Palestinian militants threatened the latest moves toward rapprochement.

''I hold out my hand in peace to our Palestinian neighbours in the hope that it won't be returned empty,'' Olmert said, in what was billed as a major policy speech.

''We cannot change the past and we will not be able to bring back the victims on both sides of the borders,'' he said. ''All that we can do today is stop additional tragedies.''

Olmert appealed to the Palestinians to form a new, moderate cabinet committed to carrying out a US-backed peace plan and securing the release of a captured Israeli soldier.

Once such a government was established, Olmert said, he would call for an immediate meeting with the moderate Palestinian president, Mahmoud Abbas, ''to have a real, open, honest, serious dialogue between us''.Palestinian legislator Saeb Erekat, a top Abbas aide, said the Palestinians were ready to negotiate a final peace deal.

''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 end game,'' Erekat said.

But the Palestinian Cabinet, led by Hamas militants who reject Israel's right to exist, accused Olmert of posturing.

''This is a conspiracy. This is a new manoeuvre. Olmert is speaking about the Palestinian state without giving details about the borders,'' said Ghazi Hamad, a government spokesman.

Olmert's speech raised the diplomatic stakes ahead of US President George W. Bush's scheduled trip to neighbouring Jordan later this week for talks with Iraq leaders.

Erekat said it was possible that Abbas would meet with the US leader there, but Israeli officials denied that Abbas and Olmert might meet on the sidelines of the Bush visit.

Olmert's comments sealed a dramatic policy shift for a man who took power just six months ago.

He was elected in March promising to set Israel's final borders with the Palestinians by uprooting isolated communities dotted all over the West Bank while holding on to major settlement blocs. Israel, Olmert said, would act unilaterally if it concluded it didn't have a Palestinian peace partner--something it appeared inclined to conclude because of Hamas' violently anti-Israel ideology.

But a summer war with Lebanese guerrillas, which many Israelis blamed on their unilateral pullout from southern Lebanon six years ago, left Israelis cool to ceding more territory, and Olmert shelved that plan.

His speech on Monday signalled a final break with that programme-- and an attempt to entice the Palestinians back to the negotiating table by outlining likely Israeli concessions under a future peace deal.—AP