Israel's prime minister backed away Monday from a target date - announced with great fanfare at a U.S.-hosted Mideast peace conference last November - for reaching a deal with the Palestinians by year's end.

Ehud Olmert said the sides will need more time to bridge differences over Jerusalem, long the toughest sticking point in Israeli-Palestinian peacemaking.

"There is no practical chance of reaching a comprehensive understanding on Jerusalem" during 2008, Olmert told a closed-door meeting of the Foreign Affairs and Defense Committee, according to an official present at the gathering.

At the same time, Olmert said Arab neighborhoods in east Jerusalem pose a danger to Israelis, hinting that Israel might want to cede control of those areas.

In recent weeks, Israeli and Palestinian leaders have scaled back their ambitious goal of signing a deal before President Bush leaves office in January, saying the best that could be hoped for was the outline of an agreement.

But Olmert's comment Monday was the clearest indication yet that the Israeli leadership sees that target as unattainable.

Differences on key issues other than Jerusalem, such as the final borders of the Jewish and Palestinian states, and the future of Palestinian refugees, were not "dramatic," Olmert said, according to the official, who spoke on condition of anonymity because the committee does not formally release details of its meetings.

When Olmert spoke, he did so with the knowledge that highlights of the panel's proceedings are routinely disclosed to the press.

Since the U.S.-hosted conference at Annapolis, Md., last November, Olmert has been meeting regularly with Palestinian President Mahmoud Abbas, and a number of working teams have been set up to discuss the details of an eventual agreement. By all accounts, progress in the talks has been slow.

Nabil Abu Rdeneh, an aide to Abbas, accused Israel of reneging on a promise.

"This is a clear violation of the Annapolis agreement," he said. "We still have six months, and that means Israel isn't serious about reaching an agreement according to Annapolis and Bush's vision."

In Washington, White House spokeswoman Dana Perino said Bush's goal was the get as much accomplished as possible. "I think we've always said that we wouldn't be able to get a final peace deal in terms of everything being resolved, but we would have this way forward that would outline all the steps that they would have to take to move forward," Perino said.

Mark Regev, a spokesman for Olmert, said the lack of agreement on Jerusalem did not need to derail the entire process. Jerusalem's fate would continue to be discussed after the other issues are agreed upon, he said.

Israel captured the eastern part of Jerusalem from Jordan in the 1967 Mideast war and annexed it. Palestinians claim the eastern sector as capital of their future state, and the fate of the disputed city - home to sites holy to Islam, Judaism and Christianity - has tormented talks for years.

Palestinians account for about one-third of Jerusalem's 750,000 residents, for the most part living separate from Jews. Most are not Israeli citizens, but all have access to Israeli social benefits and can move throughout Israel, unlike the Palestinians of the West Bank and Gaza.

Jerusalem's Arab residents lag behind the city's Jews in terms of education and employment, and their neighborhoods are typically neglected and underdeveloped. Many Arabs cross into the Jewish parts of Jerusalem to work, holding many of the city's blue collar jobs.

That freedom of movement has allowed for a string of recent attacks in the city. In two cases - the latest last week - Palestinian construction workers rammed earth-moving vehicles into cars and buses before being shot dead. One of those attacks killed three people.

A third east Jerusalem assailant burst into a religious seminary library, killing eight young students. Two border policemen were killed in separate shootings.

Olmert told lawmakers that such attacks could not be prevented as long as Palestinians remain under Israeli control in the city - hinting that the solution might be to give up control of neighborhoods where they live.

"Whoever thinks the basic pattern of life in Jerusalem can continue with 270,000 Arabs in east Jerusalem must take into account that there will be bulldozers, trucks and private cars, and no way of preventing terror attacks of this kind," Olmert said.

East Jerusalem residents "can move freely around the entire country, and there is no way of knowing what they might do," the official quoted him as saying.

Olmert has in the past expressed willingness to cede some Arab neighborhoods. Israel's West Bank separation barrier already cuts off some outlying Arab neighborhoods from the city.

Prospects for an Israeli-Palestinian peace deal have been hampered the takeover of the Gaza Strip by the Islamic militant group Hamas, a weak Palestinian leadership in the West Bank and a string of corruption probes in Israel that are threatening to topple Olmert.

Underscoring internal Palestinian tensions, Fatah forces arrested dozens of its rival Hamas members throughout the West Bank on Monday in retaliation for similar moves by the Hamas rulers in Gaza.

The mutual raids came after a bombing on Friday night that killed five Hamas militants in Gaza.