AFP, JERUSALEM - Israeli Defence Minister Ehud Barak on Wednesday demanded that Prime Minister Ehud Olmert quit over graft allegations or face early elections in a move that could put peace talks on hold.
Barak dropped the political bombshell one day after a wealthy US financier testified before a Jerusalem court that he had given Olmert vast amounts of cash to fund his political ambitions and perhaps his lifestyle.
"I think the prime minister has to disconnect himself from the day-to-day running of the state," said Barak, who heads the Labour party, a key ally in the government coalition.
"I don't mind if he suspends himself, takes leave or resigns," said Barak, himself a former premier.
He added that unless Olmert's centrist Kadima party acts to form a new government, with Labour's support, "we will work to decide on a new agreed early date for elections".
"I don't think that the prime minister can simultaneously run the government and take care of his personal affairs," Barak said.
Labour secretary-general Eitan Cabel said that if Kadima does not oust Olmert and elect a new party leader, Labour would move to set a date for early elections within two months.
Without the support of Labour's 17 MPs, Olmert's coalition government would lose its parliamentary majority in the 120-member Knesset.
Olmert, who faces three other police investigation, has denied allegations of wrongdoing.
A senior official in the prime minister's office insisted Olmert was "continuing to run state affairs and keeping to his agenda".
"It's business as usual," he said, adding, however that Olmert had cancelled a joint news conference with his Danish counterpart Anders Fogh Rasmussen that had been scheduled for Thursday.
Olmert has gained a reputation as the ultimate political survivor for weathering corruption scandals, low popularity ratings and several calls for his resignation since he became prime minister in 2006.
But now that even his coalition partners have taken the gloves off, his political future appears increasingly uncertain.
The premier's public relations advisor Tal Zilberstein, however, told army radio just hours before Barak's remarks: "The prime minister does not intend to step down."
The Palestinian Authority, for its part, worried the political crisis could affect already slow-moving peace talks, which Olmert and Palestinian president Mahmud Abbas relaunched late last year with the goal of inking a deal by the end of 2008.
"There is no doubt that events in Israel will have negative repercussions on the negotiations," Abbas's spokesman Nabil Abu Rudeina told AFP.
The affair gained momentum after Morris Talansky, a 75-year-old Jewish-American financier, testified at a Jerusalem court on Tuesday that he gave Olmert 150,000 dollars, much of it in cash.
The payments were made over a period of 14 years from the time Olmert ran for mayor of Jerusalem until he became prime minister in 2006.
The Jerusalem Post said that while dramatic, the testimony was not decisive.
It appears, the English-language paper said, that "the state still has a long way to go to shore up its case".
But Haaretz newspaper said the embattled prime minister should "explain or resign".
"If Olmert insists on continuing to retain his position at the government's helm, he is obliged to appear before the public, without delay, and present his version of the facts," it said.
Several members of Olmert's Kadima party have already let it be known they would be willing to accept the premier's job, including Foreign Minister Tzipi Livni, Transport Minister Shaul Mofaz and Internal Security Minister Avi Dichter.
Olmert has been questioned twice by anti-fraud squad officers investigating the corruption claims. While he denied the allegations, he said he would quit if indicted.
Olmert, who became premier in 2006, faces three more police inquiries into suspected corruption involving potential conflicts of interest, fraudulent property transactions, and abuse of power linked to political appointments.