U.N. Secretary-General Kofi Annan has held talks with Israeli and Palestinian leaders and urged Israel to lift its blockade of Lebanon and ease restrictions in the Palestinian territories. Israel says Hezbollah must release two Israeli soldiers if the U.N. ceasefire in Lebanon is to take full effect.

Kofi Annan met with the families of Israeli soldiers being held by Hezbollah, and held talks with Israeli and Palestinian leaders. Speaking at a joint news conference with Israeli Prime Minister Ehud Olmert, Mr. Annan urged Israel to lift its air and sea blockade of Lebanon.

"I have been urging for the immediate lifting of the blockade on Lebanon. It is important - not only because of the effect it is having on the country, but it is also important to strengthen the democratic government of Lebanon," said Annan.

For his part, Ehud Olmert did not respond directly to Mr. Annan's plea, but he did say that Israel expects the full implementation of the U.N. ceasefire resolution to take place. The Israeli prime minister says that means Israel will not take any action until its two soldiers are released by Hezbollah militants.

"The crucial test facing the international community is full implementation of Resolution 1701," noted Olmert. "Israel is fully committed to its obligations as described in the resolution. The most important aspect of implementing Resolution 1701, is the unconditional release of the abducted Israeli soldiers, Ehud Goldwasser and Eldad Regev."

Speaking in Beirut, a Hezbollah cabinet member in the Lebanese government said the militant group would not release the two soldiers unconditionally, but only as part of a larger prisoner exchange.

Mr. Annan also held talks with Palestinian President Mahmoud Abbas where he voiced support for a Palestinian unity government made up of Hamas and Mr. Abbas' Fatah political movement.

The Palestinian Authority is undergoing a severe financial and political crisis and is unable to pay most civil servants because of a funding crisis - caused by the suspension of donor aid and customs revenue, because of the Hamas refusal to recognize Israel. Israel, the United States and the European Union have classified Hamas as a terrorist organization.

Speaking at joint news conference with President Abbas in the West Bank city of Ramallah, Mr. Annan called for an end to violence in the Palestinian territories, and for Israel to ease restrictions on crossing points in the Gaza Strip.

"Over 200 Palestinians have been killed since the end of June," Annan said. "This must stop immediately. I have made my feelings known in talks with Israeli officials. Beyond preserving life we have to sustain life. The closure of Gaza must be lifted. The crossing points must be opened, not just to allow goods in, but to allow Palestinian exports out as well."

Israel says it has closed the main crossing points in and out of Gaza on a periodic basis because of the threat of terrorism.

Meanwhile, at least seven Palestinians were killed in air strikes and clashes with Israeli forces in the Gaza Strip. Israeli troops have been carrying out a major military operation in the Gaza Strip since late June, when Palestinian militants abducted an Israeli soldier on a border post raid.