Israel's Ehud Olmert said on Wednesday he would resign as prime minister after his ruling party chooses a new leader in September, leaving Middle East peace talks in limbo.

Olmert has been dogged by corruption scandals and his decision to bow out of his centrist Kadima party's leadership contest and then to step down throws Israeli politics into fresh turmoil and could lead to an early national election.

Observers say Olmert could remain for months as caretaker prime minister should the new Kadima leader fail to form a new government or if parliament dissolved itself and called a new poll.

"I have decided I won't run in the Kadima movement primaries, nor do I intend to intervene in the elections," Olmert said in a surprise announcement from his official residence in Jerusalem.

"When a new (Kadima party) chairman is chosen, I will resign as prime minister to permit them to put together a new government swiftly and effectively."

Four Kadima ministers, including Foreign Minister Tzipi Livni and Transport Minister Shaul Mofaz, both in Washington for meetings with U.S. leaders, have already launched campaigns to replace Olmert in the Sept. 17 vote.

Polls have shown Livni in the lead.

Mofaz said Olmert had made the "right decision" and said his Kadima party now has "a great responsibility to choose the next prime minister".

Hamas official Sami Abu Zuhri called Olmert's announcement "a victory" for the Islamist group, which controls the Gaza Strip.

Olmert's successor as Kadima party leader would not automatically take over as prime minister.

He or she must first cobble together a coalition government, a challenge that could prove time-consuming and complicated because of bitter divisions within parliament.

Political analysts say the process of replacing Olmert could drag on for months, possibly even into next year if a parliamentary election is called.

"I don't think there will be much choice but to hold a new election," said Eitan Cabel, a member of the left-leaning Labour party, Kadima's main coalition partner.

Recent opinion polls suggest that right-wing opposition Likud leader Benjamin Netanyahu would win a snap election.

The police investigations against Olmert involve suspicions that he took bribes from an American businessman, and that he double-claimed for travel expenses when he was trade minister and mayor of Jerusalem.

Olmert has denied wrongdoing.

He hit out at his political opponents who he said have been trying to bring him down for years.

"I will step aside properly in an honourable and responsible way, and afterwards I will prove my innocence," Olmert said.