Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas agreed on Tuesday to accelerate U.S.-backed peace talks after critics warned Israel not enough was being done to get a deal this year.

The negotiations, which President George W. Bush hopes will yield an agreement on Palestinian statehood before he leaves office next January, have been stalled by disputes over Israeli plans to build new homes near Jerusalem and Olmert's insistence on putting off talks on the fate of the Holy city.

After months of delay, Olmert and Abbas agreed on Tuesday to set up working groups that will tackle side issues like water use, Israeli officials said. Olmert's spokesman Mark Regev said negotiators would meet "almost daily" going forward.

Ahead of the meeting in Jerusalem, Palestinian Prime Minister Salam Fayyad, France's foreign minister and top U.N. officials said the pace of negotiations was too slow to reach a statehood deal before the end of the year. Fayyad said talks had to be "stepped up significantly".

The most serious peace talks in seven years were launched at a conference in Annapolis, Maryland in November but both sides remain divided on what any statehood agreement should entail.

Olmert has said the goal was an understanding on "basic principles" for a Palestinian state, rather than the full-fledged agreement that Palestinians have been seeking.

An Israeli official, speaking on condition of anonymity, said negotiators had made "some progress" on the core issues, which include borders, the fate of millions of Palestinian refugees, as well as Jerusalem.

"Israel is committed to discussing all the core issues," Regev said after the two-hour-long meeting.

Olmert angered the Palestinians earlier this week when he said talks on Jerusalem would be postponed until the end of the negotiating process. Palestinian officials denied Olmert's assertion that Abbas had agreed to the delay.

Regev said Olmert's statements on Jerusalem were "very clear" and Israeli officials said the issue did not come up in Tuesday's meeting.

Palestinian negotiator Saeb Erekat said Abbas told Olmert that "we cannot divide the final-status issues, neither can we postpone any of them".

GAZA CROSSINGS

Abbas, whose authority has been limited to the occupied West Bank since Hamas Islamists seized the Gaza Strip in June, asked Olmert to open the coastal territory's commercial crossings to let in supplies for Gaza's 1.5 million residents, Israeli officials said.

But Olmert was noncommittal. "We are considering these Palestinian requests," Regev said without elaborating.

A senior Israeli official said Olmert wanted the U.S.-backed negotiations to focus initially on borders, and then turn to the thornier issues of Jerusalem and refugees. "If you start with Jerusalem and refugees and you fail, then what?" he said.

Holding off negotiations on Jerusalem makes political sense for Olmert as it will help him retain his fragile coalition. The ultra-religious Shas party has threatened to leave the government if the negotiations focus on the fate of Jerusalem.

Israel considers Arab East Jerusalem, which it captured in a 1967 war and later annexed along with adjacent areas of the West Bank in a move that was never recognized internationally, as part of its "indivisible and eternal capital".

Palestinians want East Jerusalem to be capital of the state they hope to establish in the Gaza Strip and occupied West Bank.

While Olmert has come out publicly calling for talks on Jerusalem to be postponed, the position of Israel's chief negotiator, Foreign Minister Tzipi Livni, has remained vague.

She had made clear in private meetings she would not tell Palestinian chief negotiator Ahmed Qurie to "shut up" if he raised the issue of Jerusalem in their negotiations, Israeli officials said.

Livni is Olmert's main political rival within their centrist Kadima party and is seen as a possible successor if his government collapses.