JERUSALEM (AFP) Israel's ruling party was expected on Thursday to set a mid-September date for a leadership election under a deal reached to quell a crisis over the latest graft scandal to embroil Prime Minister Ehud Olmert.

The embattled premier was also facing a third police questioning on Friday over suspicions he had unlawfully accepted large sums of cash stuffed in envelopes from a US businessman before becoming premier in 2006.

The Kadima party's steering committee will convene on Thursday to ratify the agreement hammered out by Olmert and the party's leadership to hold the leadership election between September 14 and 18, Kadima chairman MP Tzahi Hanegbi said.

A second round will be held before September 25 if necessary, according to the draft proposal.

Foreign Minister Tzipi Livni is viewed as the front-runner in the Kadima primary, and Transport Minister Shaul Mofaz and Public Security Minister Avi Dichter are also eyeing the party's top position.

Olmert, who has admitted accepting money from Morris Talansky to finance election campaigns but has vehemently denied any wrongdoing, has vowed to remain in office as long as he does not face an indictment.

But the Talansky case, the fourth investigation to embroil Olmert, raised a political storm and a chorus of calls from within his coalition and party for him to step down.

The centre-left Labour party, Olmert's key partner, threatened to quit the coalition if the premier was not replaced, a move that would likely topple the Israeli cabinet and force new elections.

Olmert weathered the political turmoil only after agreeing to hold the primary vote, but has hinted that he might run again in the party elections despite dismal public approval rates.

Talansky testified before a Jerusalem court in May that he had given Olmert thousands of dollars in envelopes to finance his political ambitions and perhaps his taste for high living over a period of 15 years.

Although many politicians believed Olmert would not be able to hold out in the face of the political storm, he remained in office and has vowed to prove his innocence after his attorneys cross examine Talansky next week.

"A key point we must all wait for patiently is July 17. From my talks with the prime minister, he appears very determined about his innocence," Kadima MP Shay Hermesh told AFP.

"The man feels he is leading a battle for his life and that is understandable."

Olmert's close party ally MP Othniel Schneller said his political future is hinged on Talansky's cross-examination.

"As it appears today, Olmert is publicly unable to run for the party leadership. But if police announce following the investigation that there was no wrongdoing, things can change," he told AFP.