JERUSALEM - Israeli Prime Minister Ehud Olmert sat down with Palestinian President Mahmoud Abbas on Monday to talk peace before heading out on a U.S. trip soured by mounting calls for his ouster.

Olmert is up against the toughest test of his political career, following hours of explosive testimony against him by the key witness in a corruption probe. Amid the political tumult, Olmert has been trying to project a "business-as-usual" image, including holding one of his frequent meetings with Abbas.

The witness' contention that Olmert took hundreds of thousands of dollars in cash from American Jewish donors - including large sums to sustain a lavish lifestyle - have provoked unprecedented public censure and open rebellion by former political allies.

The backlash has led to efforts within his Kadima Party and coalition partner Labor to unseat him, a move that could derail already faltering peacemaking if early elections are called. Polls indicate that if elections were held today, opposition leader Benjamin Netanyahu, who takes a hard line against the Palestinians, would sweep to power.

Olmert has denied any wrongdoing and said he would resign only if indicted.

His spokesman, Mark Regev, would not disclose the Israeli agenda for Monday's talks with Abbas, saying only that "direct conversations between the two leaders is an important part of the process."

After the meeting, the Israeli leader was set to fly to Washington for talks with U.S. President George W. Bush and to address AIPAC, the influential pro-Israel lobbying group.

Olmert and Abbas resumed peace talks last November at a summit hosted by Bush, who hopes to broker a peace blueprint before leaving office early next year.

But progress has been hobbled by Israeli security concerns and Israel's failure to make concessions that the Palestinians say are crucial to recruit public support for the peace moves.

One gesture the Palestinians have unsuccessfully sought is a halt to Israeli construction in east Jerusalem and the West Bank, areas they hope will form part of their future state. Israel captured both areas in the 1967 Mideast war.

On Sunday, Israel announced plans to build nearly 900 additional homes for Jews in east Jerusalem - the sector of the holy city the Palestinians claim as capital of a future state.

Before meeting with Olmert at his Jerusalem residence on Monday, Abbas denounced the Israeli construction.

"If Israel does not stop these settlement activities, then it is difficult to reach a peace agreement," he said at a joint news conference at his West Bank headquarters with visiting German Foreign Minister Frank-Walter Steinmeier.

Steinmeier urged both sides to "refrain from anything that would hinder an agreement.

"This includes violence, such as rocket attacks from Gaza at Israel," he said. "However, this also includes settlement construction, which makes your (Abbas') current talks with Prime Minister Olmert anything but simple."

Israel says it is building only in places it intends to keep under a peace accord. These include major settlement blocs, where the vast majority of West Bank settlers live, and east Jerusalem, which Israel annexed after the 1967 war. The annexation has never been internationally recognized.

Palestinian negotiator Saeb Erekat said Monday's talks would also include a review of the last six months of peace efforts, along with discussions on Egyptian-brokered efforts to mediate a cease-fire between Israel and Palestinian militants in the Gaza Strip who attack southern Israel with rocket and mortar fire almost daily.

On Monday, Israeli Defense Minister Ehud Barak said Israel did not rule out a large-scale military operation against Gaza militants, but said Israel must first "exhaust all other avenues."

He spoke after appearing before parliament's influential foreign affairs and defense committee.

At the panel meeting, Barak also addressed another key Palestinian demand - the removal of the hundreds of military roadblocks that seriously hinder Palestinian movement and commerce in the West Bank.

"If a Palestinian day is not 24 hours long, but 23 hours and 20 minutes long because of the roadblocks, then that is the price to be paid for Israeli security, and the blame lies with Palestinian terrorism," a participant at the committee meeting quoted the defense minister as saying.

Although Israel is considering removing further roadblocks, "we have done most of what we can do," Barak said.

The meeting participant spoke on condition of anonymity because the meeting was closed.

Israel considers the roadblocks to be a crucial element of its efforts to keep out Palestinian attackers.But the Palestinians and the World Bank have said the battered Palestinian economy cannot recover unless roadblocks come down.