Palestinian President Mahmoud Abbas has rejected an Israeli peace proposal because it does not provide for a contiguous Palestinian state with Jerusalem as its capital, Mr Abbas's office said yesterday.

Nabil Abu Rdainah, Mr Abbas's spokesman, told the official Wafa news agency Israeli Prime Minister Ehud Olmert's plan showed a "lack of seriousness".

Mr Olmert's proposal does not offer a solution to competing claims to the holy city of Jerusalem, and would only be implemented once Mr Abbas reined in militants and re-established control of the Gaza Strip, which Hamas seized a year ago.

Under the proposal, Israel would return to the Palestinians some 92.7 per cent of the occupied West Bank, plus all of the Gaza Strip, according to Western and Palestinian officials briefed on the negotiations.

In exchange for West Bank land that Israel would keep, Mr Olmert proposed a 5.3 per cent land swap giving the Palestinians a desert territory adjacent to the Gaza Strip.

Mr Olmert's proposal first emerged several months ago and was published in detail yesterday by Israel's left-leaning Haaretz newspaper, prompting Abu Rdainah's response.

"The Israeli proposal is not acceptable," Mr Abbas's spokesman said. "The Palestinian side will only accept a Palestinian state with territorial continuity, with holy Jerusalem as its capital, without settlements, and on the June 4, 1967 boundaries."

Abu Rdainah was referring to the borders that existed prior to the 1967 Middle East war in which Israel seized Arab East Jerusalem, Gaza Strip and the West Bank.

He called the Israeli proposal a "waste of time".

Launched in November with the goal of reaching a statehood deal this year, the US-sponsored talks have shown little outward sign of progress and have been marred from the start by violence and disputes over Israeli settlement building.

The chances of a peace deal faded further with Mr Olmert's announcement last month that he would step down as Prime Minister once his centrist Kadima party chooses a new leader in September.

Mr Olmert's spokesman Mark Regev said the Prime Minister was serious about continuing the peace talks.