The Palestinians' top peace negotiator said yesterday he feared a criminal investigation of Israeli Prime Minister Ehud Olmert could damage the chance of a deal this year on Palestinian statehood.

Though Olmert has denied wrongdoing in his ties to an American businessman at the centre of a police inquiry into allegations of bribery, the prime minister said on Thursday he would resign if indicted - a likely setback to efforts to secure a peace accord from the US-sponsored talks before US President George W. Bush steps down in January.

"The developments in the Israeli political system and the investigation could make it difficult to conclude an agreement this year," Ahmed Qurie, a former Palestinian prime minister who now leads peace talks, said in a speech in Ramallah.

"I am not optimistic that an agreement can be concluded this year, but I am also not pessimistic," he said, echoing concerns expressed by more junior members of Palestinian President Mahmoud Abbas's administration after the affair broke last week.

Bush is scheduled to visit Israel on Wednesday to celebrate its 60th anniversary and give a high-profile push to talks on creating a Palestinian state alongside the Jewish state.

The White House, already at pains to overcome mutual recrimination bogging down Israeli-Palestinian diplomacy, has played down the potential fallout of Olmert's legal woes, noting he is not the only Israeli leader committed to peacemaking.

If Olmert were to step down, it could trigger snap elections that opinion polls suggest would catapult hawkish former Prime Minister Benjamin Netanyahu - a vocal opponent of ceding occupied West Bank land to Abbas - back to power.

Olmert has the option of taking a leave of absence, in which case his powers would be assumed by Foreign Minister Tzipi Livni - Qurie's counterpart in the negotiations.