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Olmert's proposal implies Israeli willingness to give up sovereignity over the Temple Mount, the Old City and the Mount of Olives. The offer appears to contradict Olmert's promise to Shas never to negotiate over Jerusalem and was never revealed to the Israeli public while he was in office

Olmert also told Newsweek he suggested to Abbas Israel would withdraw from 93.5 to 93.7 per cent of the West Bank, compensating the Palestinians with territory equivalent to 5.8 per cent of the West Bank, and allow for direct crossing between the West Bank and the Gaza Strip.

He stressed he rejected Palestinian demands to realize the right of return, and instead offered a "humanitarian gesture" of accepting a small number of Palestinian refugees, "smaller than the Palestinians wanted, a very, very limited number."

Olmert's offer was confirmed to Newsweek by Saeb Erekat, the chief Palestinian negotiator. "It's very sad. He was serious, I have to say," Erekat said. He said that he and Abbas began preparing a response, but within a few months the Gaza war erupted, and Olmert had left office.

"This approach is very clear and also we had some understandings with the previous administration (of George W. Bush) and we try to keep this direction," he said. Clinton disagreed. "In looking at the history of the Bush administration, there were no informal or oral enforceable agreements," she said, repeating earlier statements.

Mitchell has said a key element has been trying to pin down exactly what Israel means by the "natural growth." Netanyahu says he wants growing families to be able to accommodate their children in towns that Israelis have built on occupied land.

The officials, speaking on condition of anonymity, said allowances for continued building could be made if, for example, a project in a settlement was nearing completion or for cases in which money has been invested in a project and cannot be reimbursed.

The new posture of the Israeli government is certain to complicate the already tenuous position of Palestinian moderates, foremost among them President Mahmoud Abbas, who has staked everything on the two-state solution. "This minister is an obstacle to peace," said Yasser Abed Rabbo, an aide to Mr Abbas. "Nothing obliges us to deal with a racist person hostile to peace."

Tzipi Livni, who in the previous government oversaw the final status negotiations and was present in the Foreign Ministry yesterday, told Mr Lieberman that "your speech has proven to me that I did the right thing by not joining [a national unity government]".

This would also make it difficult to reach agreement between Israel and the Palestinians on the question of permanent borders.

The outlines of the evidence gathered comes hard on the heels of the disclosure by the Oranim Academy's pre-military course last week of devastating witness accounts supplied by soldiers involved in the fighting, including the "unjustified" shooting of civilians.

With Israeli newspapers threatening new disclosures, the New York Times has weighed in with an interview with a reservist describing the rules of engagement for the Gaza operation. Amir Marmor, a 33-year-old military reservist, told the newspaper that he was stunned to discover the way civilian casualties were discussed in training talks before his tank unit entered Gaza in January. "Shoot and don't worry about the consequences" was the message from commanders, said Marmor. Describing the behaviour of a lieutenant-colonel who briefed the troops, Marmor added: "His whole demeanour was extremely gung-ho. This is very, very different from my usual experience. I have been doing reserve duty for 12 years, and it was always an issue how to avoid causing civilian injuries. He said that in this operation, we are not taking any chances. Morality aside, we have to do our job. We will cry about it later."

Last Thursday, the special rapporteur to the UN Human Rights Council, Richard Falk, said that the assault on Gaza appeared to be a "war crime of the greatest magnitude" and called on the UN to establish an experts' group to investigate potential violations.

Attempts by the Israeli media to publish the rules of engagement for the Gaza campaign have been blocked by the military censor, but in the past couple of weeks the contents of those rules have begun to to emerge in anecdotal evidence - suggesting strongly that soldiers were told to avoid Israeli casualties at all costs by means of the massive use of firepower in a densely populated urban environment.

An investigation by reporter Uri Blau, published on Friday in Haaretz, disclosed how Israeli soldiers were ordering T-shirts to mark the end of operations, featuring grotesque images including dead babies, mothers weeping by their children's graves, a gun aimed at a child and bombed-out mosques. Another T-shirt designed for infantry snipers bears the inscription "Better use Durex" next to a picture of a dead Palestinian baby, with his weeping mother and a teddy bear beside him. A shirt designed for the Givati Brigade's Shaked battalion depicts a pregnant Palestinian woman with a bull's-eye superimposed on her belly, with the slogan, in English, "1 shot, 2 kills".

Egypt has been brokering the indirect talks. Hamas are demanding the release of more than 400 of the thousands of Palestinian prisoners held by Israel.

Reports from the talks say one of the issues dividing the sides was Israel's wish to deport some of these prisoners, fearing they would be a security risk if released to the West Bank. Hamas representatives have said the group rejects the deportation proposal on principle.

The outgoing prime ministers has also said he wanted to make Sgt Shalit's release a precondition for a wider ceasefire agreement with Hamas, under which Hamas wants the crossings into Gaza fully opened to allow rebuilding after the recent Israeli operation.

The king also pressed Mr Netanyahu to stop Israeli settlement building on Palestinian land and "seize the current historic opportunity to make peace with the Arabs".

The BBC's Paul Wood in Jerusalem says the frantic activity is because Israel fears being diplomatically isolated ahead of his Washington trip. On Monday, King Abdullah warned that failure to reach an agreement for peace in the Middle East would result in a new conflagration within 12-18 months.

In comments to a UK newspaper, he said the US was finalising a comprehensive solution to Israel's conflicts with the Palestinians, Syrians and Lebanese that would involve all 57 Arab and Muslim states. Our correspondent says everything appears to be leading towards a visit by President Obama to Cairo next month, during which he is expected to announce his support for the Jordanian plan in some form.

To the IDF commander Dayan wrote, "I see this destruction and issuing of various decrees as very serious. It is collective punishment for the wrongful deeds of a few."