JERUSALEM -- Prime Minister Ehud Olmert promised Monday to "forge a historic path" toward a final settlement with the Palestinians at this week's first peace talks in nearly seven years.

Israeli and Palestinian negotiators are set to meet Wednesday to begin talks aimed at reaching a peace agreement by the end of 2008.

Olmert and Palestinian President Mahmoud Abbas set the target at last month's Mideast peace conference in Annapolis, Md.

Speaking at a business conference in Tel Aviv, Olmert acknowledged that the new dialogue is full of risks. He said Abbas' government is weak, and that Palestinian security forces are not yet capable of ensuring law and order in the West Bank.

"This is an opportunity that entails many uncertainties, many risks, many dangers," Olmert said. "We cannot ignore them. But we absolutely must not allow uncertainty and risks to prevail because an opportunity also exists."

"I intend to take advantage of this opportunity to wage serious, ongoing and uninterrupted negotiations in order to forge a historic path toward a new diplomatic reality," he said.

Olmert rejected criticism from domestic hard-liners who oppose concessions to the Palestinians, warning that if Israel does not agree to relinquish control of Palestinian areas, "the idea of one state for all residents with equal rights to vote threatens the existence of the state of Israel."

The last round of peace talks broke down in violence in early 2001, shortly after the eruption of the second Palestinian uprising.

Israeli and Palestinian officials have said Wednesday's meeting is likely to focus on technical issues, with the real work to begin after an expected visit by Bush early next month.

But already, the talks have run into trouble following Israel's announcement last week that it plans to build more than 300 new homes in disputed east Jerusalem. The Palestinians have accused Israel of negotiating in bad faith over Jerusalem, one of the most contentious issues in the Israeli-Palestinian conflict.

The Palestinians want to make east Jerusalem the capital of a future independent state. Israel captured east Jerusalem in the 1967 Mideast war and annexed the area. It has signaled it would turn over Arab sections of the city to the Palestinians, but plans to retain all Jewish neighborhoods in the city.

The latest construction project is in Har Homa, a new Jewish neighborhood built in east Jerusalem. Secretary of State Condoleezza Rice said last week the new apartments would not "help to build confidence" for new peace talks. The Palestinians have asked the U.S. to intervene to halt the construction.

"This issue needs to be worked out before we start negotiations," Abbas confidant Yasser Abed Rabbo said. But he did not say construction must be halted as a condition for talks to begin.

The lead Israeli and Palestinian negotiators were meeting Monday to discuss this latest setback.

The status of Jerusalem is one of the "core issues" Olmert and Abbas hope to tackle next year, along with the final borders of a Palestinian state and the fate of millions of Palestinian refugees whose families lost properties during Israel's 1948 War of Independence.

While each of these issues is likely to spark heated discussions, the talks are further complicated by the Hamas militant group's control of the Gaza Strip.

Hamas took over Gaza in June after routing pro-Abbas forces there. Abbas responded by expelling Hamas from the government and installing a Western-backed administration in the West Bank.

Although Abbas claims to represent the people of Gaza, he wields little control there, raising questions about his ability to carry out a peace agreement in the future.