Palestinian negotiators said on Thursday that Israeli Prime Minister Ehud Olmert's resignation would deal a swingeing blow to peace hopes at a crucial time in the negotiations.

While the Islamist Hamas hailed the news, Palestinian negotiators mourned the loss of a man they felt is "serious" about peace.

The Palestinian Authority's official position is that the corruption allegations that have dogged Olmert and Wednesday's news he will step down after September's contest for the leadership of his Kadima Party are an internal matter.

Palestinian President Mahmoud Abbas said on Thursday he would work with whoever becomes premier, and Foreign Minister Riyad Malki said the resignation would not affect the talks because the Israeli government, rather than just Olmert personally, was committed to peace.

"We will work with any prime minister elected in Israel and we will continue with Ehud Olmert until the arrival of his successor," Abbas told a news conference in Tunisia.

"We are not worried by the change in Israeli prime minister because we know that Israel is seriously engaged to remain involved in the negotiation process with the Palestinians," Malki told a news conference in Madrid.

But privately many Palestinian officials feel they will lose a partner who was willing to negotiate over the most contentious issues of Jerusalem and borders.

"We have taken part in the most important negotiations [with Olmert] since 1991," said one senior negotiator under condition of anonymity. "The Israelis listened to us and discussed the issues," he added.

Another top Palestinian negotiator and former minister, Mohammed Ashtiyah, said Olmert was "serious and involved" in the peace talks, even though they have so far failed to make major progress.

Peace efforts, dormant for seven years, were revived at a US conference last November when Israel and the Palestinians agreed to resume talks.

The Palestinians agreed to halt violence, while the Israelis committed themselves to freezing Jewish settlements in occupied territories.

US President George W. Bush wants a deal before the end of his term in January, although Abbas said on Thursday he doubted it would happen this year.

The change of US president will put pressure on negotiations although Abbas said he had been reassured by the presidential hopefuls that peace talks would be relaunched immediately after the winner takes office.

"The negotiations have reached a crossroads. We do not know who will make up the next government coalition, or the name of the future prime minister," Ashtiyah said.

Foreign Minister Tzipi Livni and Transport Minister Shaul Mofaz are the two frontrunnners in the race to become leader of the centrist Kadima.

Livni has a reputation among Palestinians as being relatively pragmatic, but former defence minister and army chief-of-staff Mofaz is considered a hawk.

"If Livni is elected, the negotiations can continue. But if Mofaz wins, that will be more difficult," Palestinian political economist Hani Masri said.

Olmert's announcement was the crescendo of a political storm unleashed when police launched a probe in May over suspicions he had accepted large sums of money from US financier Morris Talansky to fund political campaigns and a lavish lifestyle in the 13 years before he became premier.

He is set to be questioned by police at his residence in Jerusalem on Friday for the fourth time since May.

Hamas, which has controlled the Gaza Strip since routing forces loyal to Abbas in June last year, called the news Olmert was going a "victory for the resistance" and a move that undermined Abbas' credibility in peace talks.

"This is a great blow to [the Palestinian Authority] which has hitched its fate to the possibility of achieving an agreement by the end of the year," Hamas spokesman Sami Abu Zuhri said.