Prime Minister Ehud Olmert on Monday said he was sorry for the plight of Palestinians and Jews who became refugees as a result of Israel's establishment.

"I join in expressing sorrow for what happened to the Palestinians and also for what happened to the Jews who were expelled from Arab states," the prime minister said.

Olmert made the comments before a meeting of the Knesset Foreign Affairs and Defense Committee, apparently in his last such session as prime minister. He was speaking in reference to the key Palestinian demand for a "right of return" in peace negotiations with Israel.

"Under absolutely no circumstances will there be a right of return," Olmert declared, "but we are prepared to be part of an international mechanism that will work to solve the problem."

Palestinians have demanded that Israel accept responsibility for the suffering of Palestinians who fled or were driven from their homes in the War of Independence that followed Israel's 1948 creation.

Olmert's remark Monday fell far short of meeting this demand. But it was unusual for an Israeli prime minister to say Israel will participate in expressing sorrow for what happened to them.

The premier also said that a peace deal with the Palestinian Authority will involve proportionate land swaps between the two sides.

"The territorial price of peace with the Palestinians will bring us very close to the land-for-land formula. This needs to be said forthrightly and with courage. There are different ways of reaching this formula through annexing or exchanging territories," Olmert said.