JERUSALEM, (Reuters) – Prime Minister Ehud Olmert signalled on Tuesday that Israel might have no choice but to agree to divide Jerusalem in a future peace deal with the Palestinians.

“The world that is friendly to Israel … that really supports Israel, when it speaks of the the future, it speaks of Israel in terms of the ’67 borders. It speaks of the division of Jerusalem,” Olmert said in an interview with The Jerusalem Post.

Israel captured Arab East Jerusalem in the 1967 Middle East war and annexed it in a move that has not won international recognition. It regards all of Jerusalem as its “eternal and indivisible” capital.

Palestinians want East Jerusalem to be the capital of the state they aspire to establish in the occupied West Bank and in the Gaza Strip.

The future of Jerusalem is one of the core issues that Israel and the Palestinians agreed to tackle in peace talks they renewed after a U.S.-sponsored summit in Annapolis, Maryland in November.

Both sides have said they hoped to reach a peace agreement before U.S. President George W. Bush, who visits Israel and the West Bank next week, leaves office in January 2009.

Olmert, a former mayor of Jerusalem, has already questioned publicly the wisdom of annexing outlying Arab neighbourhoods of the city after the 1967 conflict, comments that have drawn criticism from Israel’s right-wing. But he has made clear Israel would not agree to return to its pre-1967 borders. In the newspaper interview, he reiterated that Israel intended to keep its largest settlement in the West Bank — Maale Adumim, near Jerusalem — in any peace deal.