A Palestinian negotiator said on Wednesday any peace deal with Israel would be delayed if a police investigation of Prime Minister Ehud Olmert forced his resignation and a new election was held.

Saeb Erekat described the case as an internal Israeli matter but said Palestinians were following developments closely.

"If they decide to hold a new election then we will be late another year. If (Israeli Foreign Minister Tzipi) Livni takes over, we will remain the same," Erekat said, referring to Olmert's designated deputy.

The United States, brokering talks on Palestinian statehood that have shown little visible progress since they began nearly six months ago, hopes a deal can be sealed before President George W. Bush leaves office in January.

Already the focus of a series of corruption scandals in which he has denied any wrongdoing, Olmert was interrogated at short notice by police on Friday over fresh allegations. A court gag order is in effect on reporting details of the suspicions.

Olmert allies say right-wing opponents want to scupper his U.S.-brokered talks with the Palestinians. In an Israeli memorial day address in Jerusalem on Wednesday, Olmert spoke of his hopes for peace.

"There is nothing we want more than to end the conflict with our neighbors ... it definitely is not a conflict without a solution, despite all the difficulties and residue of bad feelings," Olmert said.

GAG ORDER

Olmert has said he had cooperated with police investigators and condemned what he called "malicious and vicious rumors" about the case. A court is due to hear on Friday another appeal by Israeli media outlets to lift the gag order.

Olmert's office denied a report on al-Jazeera satellite television that quoted unidentified sources as saying he planned to quit or temporarily step down next week.

If Olmert did leave office early, his Kadima party could name a successor from within its own ranks. The likely frontrunner would be Livni, who is also deputy prime minister and Israel's chief peace negotiator with the Palestinians.

An election could follow an Olmert resignation if his coalition breaks up. A national vote is not scheduled until 2010.

Yasser Abed Rabbo, a member of the Palestinian negotiating team, said the prospect of Olmert leaving office "does not bother us in any way".

"In any case, there is no progress (in peace talks with Israel)," Abed Rabbo said.

Nabil Abu Rdainah, an aide to Palestinian President Mahmoud Abbas, said Palestinians could deal with any Israeli leader.

"We even dealt with (Ariel) Sharon," he said, referring to the former Israeli prime minister who had long been a hated figure in the Arab world over a military and political career that included directing the 1982 Israeli invasion of Lebanon.

U.S. officials have privately said they are taking the investigation against Olmert seriously given its possible ramifications for peace efforts. The case could cloud a visit to Israel next week by Bush to celebrate its 60th anniversary.