Israel conveyed its displeasure to Washington on Thursday over remarks reportedly made by US Consul General Jacob Walles that it had agreed to start negotiations with the Palestinians over Jerusalem. The comments prompted a bitter row among Kadima's would-be leaders.

According to government sources, Walles's comments, which appeared in the Palestinian daily Al-Ayyam, were "highly inappropriate," since there is a US-Palestinian-Israeli agreement not to go public with what is being discussed by the negotiators.

The paper quoted Walles as saying in an interview that US Secretary of State Condoleezza Rice told both sides during her visit here last month that the basis for the negotiations was an Israeli withdrawal to the pre-1967 lines, including from east Jerusalem. Walles said changes to those lines were possible should both sides agree.

Prime Minister Ehud Olmert told a Kadima Party meeting at Kfar Hamaccabiah in Ramat Gan on Thursday night that his government was sticking by its position that Jerusalem should be left until the end of the talks.

"We have achieved significant progress, but we haven't started the negotiations on Jerusalem yet," Olmert told a crowd of several hundred party activists and supporters. "We said this issue would be handled last, and that is what we'll do."

Olmert said he still believed a final-status peace agreement was within reach by the end of 2008, and that he would do everything in his power to strike a deal during his last days in office - "an agreement," he said, "that would protect Israel from now on."

Olmert's spokesman Mark Regev also denied that Jerusalem was being discussed.

"It was agreed at Annapolis to deal with all the core issues, but up until now we haven't started negotiations on Jerusalem at all," he said. "What the prime minister proposed was to separate Jerusalem from the other issues, and deal with it separately in an agreed-upon mechanism."

Foreign Minister Tzipi Livni, in an interview on Channel 1, said in reference to the Walles comments that "what was said was not correct."

She refused to answer when asked whether she thought Israel should control the Arab neighborhoods of east Jerusalem.

After the problematic nature of Walles comments became clear - they contradict what Olmert has been saying for months, and also put Livni, the head of Israel's negotiating team, in an uncomfortable position facing next week's Kadima primary - State Department spokesman Sean McCormack issued a clarification.

"The US government has not taken a position on borders," the McCormack statement read.

"While the discussions between the parties are confidential, we can state that the parties have not in any way prejudiced long-held views on borders. A senior US official who participated in the discussions denies that the Israeli side, led by chief negotiator Foreign Minister Livni, has been willing to negotiate concerning Jerusalem. The secretary participated in the negotiations in a way that respected the Israeli position."

During his interview, Walles said that although the goal of the Bush administration was to have a working agreement between the Palestinians and the Israelis by the time US President George W. Bush leaves office in January, should that deadline fail to be achieved, all progress made up until that point would pass over to the next administration.

The US was not interested in an interim document to be presented at the upcoming meeting of the UN General Assembly in New York, he said.

Walles also said that Israel had made little progress in removing settlement outposts, and had increased settlement construction since the Annapolis conference last November.

Livni's chief rival in the upcoming Kadima primary, Transportation Minister Shaul Mofaz, responded to the Walles interview by slamming Livni, saying she could no longer get away with not revealing whether she thought Jerusalem should be divided, and whether she has divided it in the negotiations that she is leading.

"What was published is nothing less than a scandal," Mofaz said. "The future of the capital of Israel is not a matter for secret negotiations. I say clearly, I will not allow Jerusalem to be harmed.

"Beyond Tzipi Livni's ethical lapse, her lack of leadership and courage prevent her from clarifying her stance to the public," he charged. "This is a strategic mistake that harms Israel's security and its future, and could be a tragedy forever."

Sources close to Livni responded that she had no intention of "stooping" to Mofaz's level of debate, and that these comments showed the desperation of his campaign.

Livni, they said, would "continue to look after Israel's interests with good judgment and responsibility."

Opposition leader Binyamin Netanyahu said

Walles's comments proved the current government's ineptitude.

"The government lost all moral validity and legitimacy a long time ago," he said. "The time has come to have an election."

Netanyahu added that the Likud would not join a Kadima-led government, but that if the Likud won the next election he would form a national-unity government that would follow the Likud's path.

By contrast, Meretz MK Yossi Beilin praised the remarks made by Walles, saying there would never be a solution to the Israeli-Palestinian conflict without a divided Jerusalem. According to Beilin, Israel had already agreed to such a division as far back as 2000.

In a related development, sources in the Prime Minister's Office did not rule out the possibility that Olmert would travel to New York in two weeks to take part in the debates at the annual UN General Assembly meeting.

Although Israel and the Middle East will figure prominently in the discussions there, and while the Quartet - the US, Russia, EU and UN - will meet on the sidelines to discuss the status of the negotiations, Foreign Ministry sources said it was not yet clear who would attend to speak on Israel's behalf.

A source in the Prime Minister's Office, when asked if Olmert might go to New York, said it was "not yet decided" who would attend the meeting.

Another diplomatic official, however, doubted that the prime minister would participate in the meeting, if only because it would be likely that many of the leaders he would be interested in meeting there might not make time for him because he is on his way out of office.

Livni, meanwhile, is likely to be preoccupied during the week of the UN meeting - either with a primary runoff if she doesn't win outright next week, or, if she does win the vote on September 17, trying to put together a government coalition.

EU foreign policy chief Javier Solana, in a speech to the European Parliament's Foreign Affairs Committee on Thursday during which he announced that he would be coming to Israel and the PA from Friday to Sunday, said that given the Kadima primary, "a new political situation will probably emerge."

The EU, he added, needed "to take all of that into consideration.

Solana is scheduled to meet with Livni on Friday.

Solana said there would be a number of "important" meetings on the Middle East at the UN in two weeks' time, and that it was necessary to retain the momentum of the Annapolis process "to try and ensure that what has been achieved in the way of negotiations up until then is not lost, and that we can continue to move on from the beginning of 2009."

Gil Hoffman contributed to this report.

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