Ehud Olmert

An Israeli newspaper says Prime Minister Ehud Olmert has proposed an agreement with the Palestinians that would allow Israel to annex about seven percent of the West Bank as part of a final peace deal.

The Ha'aretz daily says Israel would in turn give the Palestinians "alternative" land in the Negev desert, adjacent to the Gaza Strip, territory that is equivalent to about five percent of the West Bank. Israel also would open a passage to allow Palestinians to travel between the West Bank and Gaza.

However, Palestinian President Mahmoud Abbas would only receive the land once his forces regain control of Gaza from the Palestinian militant group Hamas, which seized power of the coastal territory last year.

Palestinian negotiator Saeb Erekat called the report of an Israeli offer a "half-truth." He accused Israel of trying to make it look as if the Palestinians were responsible for rejecting a peace deal.

Israeli government spokesman Mark Regev declined to comment on the report. But he said negotiators are making progress on a number of issues, including the subject of borders.

Ha'aretz says the seven percent of the West Bank to be annexed by Israel would include the major settlement blocs around Jerusalem and some settlements in the northern West Bank.

It says the proposed agreement includes a demand that the future Palestinian state be demilitarized and without an army.

The agreement would also include a solution to the issue of Palestinian refugee status, allowing some refugees from the 1948 war to return to Israel while settling most of the refugees and their descendants in the Palestinian state. But the proposed plan does not cover the thorny issue of the status of Jerusalem.

Israel claims all of Jerusalem as its capital, including the eastern sector that it captured in the 1967 Mideast war. Palestinians want east Jerusalem as the capital of a future state. The area contains religious sites holy to Jews, Muslims and Christians.

Some information for this report was provided by AFP and AP.