By Adam Entous, Reuters

By Adam Entous

JERUSALEM (Reuters) - Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas will meet in Jerusalem on Wednesday, a week after Olmert threw U.S.-sponsored peace talks into limbo by announcing that he would step down.

Aides said Olmert favored freeing some Palestinian prisoners held in Israeli jails as a goodwill gesture to Abbas, but they gave no timeline.

Palestinian negotiator Saeb Erekat said Abbas would "raise a number of issues, such as the permanent-status issues, checkpoints and prisoners."

Israel's cabinet on Sunday approved the release of five Palestinian prisoners as part of a swap deal with the Lebanese Hezbollah guerrilla group that brought the bodies of two Israeli soldiers home.

Israel released 429 Palestinian prisoners last December to bolster Abbas. A smaller group was released in October.

The issue of prisoners is highly emotive for Palestinians, who see their brethren held in Israeli jails as fighters against foreign occupation. Many Israelis fear that such amnesties encourage Palestinian militants to strike again.

Palestinian Prisoner Affairs Minister Ashraf al-Ajrami told Reuters that Abbas would insist that any deal include long-serving prisoners, women and children as well as political leaders, a reference to uprising leader Marwan Barghouthi, seen as a possible successor to Abbas.

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Israeli-Palestinian peace talks, aimed at reaching a statehood deal in 2008, have been marred by disputes over Jewish settlement building and violence.

Faced with a widening corruption probe, Olmert announced last Wednesday that he would stand down as premier after a September 17 leadership contest within his centrist Kadima party.

But he has vowed to press ahead with the negotiations with the Palestinians and indirect talks with Syria until his last day in office.

Erekat said Olmert and Abbas would be joined on Wednesday by their chief negotiators, including former Palestinian prime minister Ahmed Qurie and Israeli Foreign Minister Tzipi Livni, a top contender to become Kadima's new chief.

Israeli officials say the United States has been pushing the two sides to agree a written document as early as September.

But Livni has played down Washington's timeline for a deal in 2008. Israeli sources say she is reluctant to put Israeli positions down on paper because they could be used against her in the Kadima leadership contest.

"We decided and promised to make all the efforts to reach the peace treaty until the end of the year. We are making all the effort to do so," Livni told CNN in a weekend interview.

"But what is more important is now the understanding between Israelis and the Palestinians that we are on the right track... The timeline is less important," she added.

Olmert told parliament last week a full Israeli-Palestinian peace accord that includes Jerusalem was not within reach this year, but differences over borders and refugees were bridgeable.

(Additional reporting by Mohammed Assadi in Ramallah; Writing by Adam Entous; Editing by Robert Hart)