Israel was bracing on Tuesday for a possible eruption in the political landscape if Prime Minister Ehud Olmert resigns or is suspended over the latest corruption probe into his affairs.

The atmosphere of uncertainty has been heightened by a whirl of rumours and speculation due largely to a media blackout imposed on details of the case against the 62-year-old premier.

The anti-fraud investigation is the fifth such probe of Olmert's dealings before he became prime minister in 2006, although one case against him has been dismissed. He has denied any wrongdoing.

Israeli media speculated that there has been a "significant development" in the new case and that Israel's justice department may lift the gag order, which several news organisations have asked the courts to remove.

Olmert's former office manager, Shula Zaken, was questioned for a fourth time Tuesday, public radio said.

"We recognise the public's right to know, but we must also take into consideration the needs of the inquiry," said national police chief Dudy Cohen. "No one, no matter what his position, is above the law." Preparations are taking place on the political front in case charges are brought by Attorney General Menachem Mazuz, a move that would force Olmert to step aside while the case makes its way through the courts.

Foreign Minister Tzipi Livni, a member of Olmert's centrist Kadima Party, is the most likely candidate to succeed him, military radio reported.

Olmert has denied any wrongdoing, and on Sunday said he would cooperate fully with investigators, voicing confidence the inquiry would put an end to "vicious and destructive rumours".

Israel's mass-selling Yediot Aharonot newspaper reported on Friday that Olmert was suspected of having received large sums of money from an American businessman, apparently to help finance some of his election campaigns.

The Jerusalem district court which is looking into the charges against Olmert has revealed that an unidentified foreign national has been questioned as a witness, local media reported.

Olmert, who was questioned by investigators for more than hour on Friday, has insisted that he will continue his duties as premier.

But in a rare step he has cancelled all interviews with local media ahead of the Israel's 60th anniversary celebrations this week.

When a premier resigns it is up to the president, currently Shimon Peres, to pick a successor who can try to form a government.

Failing that, early elections must be held.

Behind the scenes, the political manoeuvring has begun.

The ultra-Orthodox Shas Party has said it would remain in a government led by Livni if she agrees not to disrupt the status quo between religious and secular factions.

Another high-profile politician, Defence Minister Ehud Barak, also a former Labour Party minister, cannot be considered to succeed Olmert as he is currently not a member of the Knesset, the Israeli parliament.

Barak and other centre-left moderates are not eager for new elections for fear of returning to power the head of the right-wing opposition and former Likud premier, Benjamin Netanyahu, a favourite in recent opinion polls.

Still, Barak warned on Tuesday that his Labour Party "must take into account the fact that in our current political situation the next elections could be called unexpectedly, and we have to be prepared." During a parliamentary debate on Monday, Netanyahu questioned Olmert's right to continue to hold peace talks with the Palestinians, which were revived under US auspices in November after a near seven-year hiatus.

"Is it ethical for Olmert to lead negotiations with the Palestinians while he is under investigation?" Netanyahu asked.