Eight months into its difficult negotiations with the Palestinians, Israel has drawn up a detailed proposal for a peace agreement in principle, offering to withdraw from 93 per cent of the West Bank, an Israeli newspaper reported Tuesday.

The proposal includes arrangements on three bottleneck issues of the decades-old Israeli-Palestinian conflict: borders, the Palestinian refugee problem and security, the authoritative Ha'aretz daily said, quoting a "senior Israeli official."

But it sidelines the issue of Jerusalem, postponing a solution on that highly sensitive issue until later, the report said.

Israeli Premier Ehud Olmert presented the proposal to Palestinian President Mahmoud Abbas and was awaiting a reply, Ha'aretz said.

Olmert's spokesman, Mark Regev, would not comment on the content of the negotiations, but told Deutsche Presse-Agentur dpa "important progress" had been made, including on the issue of borders.

A senior Palestinian negotiator, Saeb Erekat, however, called the report in Ha'aretz a "bunch of half truths," and vehemently denied to dpa that the issue of Jerusalem was off the negotiating table.

Hamas spokesman Sami Abu Zuhri said he doubted Olmert's offer was "serious."

According to the report in Ha'aretz, Olmert offered the Palestinians land in the southern Israeli Negev desert, adjacent to the Gaza Strip, compensating for 5.5 per cent of the 7 per cent of the West Bank that Israel wants to annex. This would allow Israel to keep its major Jewish settlement blocs.

In addition, the Palestinians would get a free passage, which would link the Gaza Strip with the West Bank, but nominally remain under Israeli sovereignty.

According to the Ha'aretz leak, which comes as US Secretary of State Condoleezza Rice is expected in the region next week, Olmert feels he has no time left to reach an agreement during his remaining period in office.

He is under police investigation over suspicions of corruption and has announced he will resign as soon as his ruling Kadima party elects a new leader next month.

Olmert and Abbas pledged late last year to try and reach a peace deal by the end of 2008. They have since held troubled but intense negotiations, that ended a seven-year freeze in the peace process.

The Ha'aretz report is the first detailed account leaked of the highly classified negotiations since they began in December. The talks are held away from the media due to their sensitive nature.

Regev said that while he could not comment on the outcome of the talks, "I can say that we've had important progress on different issues that have been discussed including on the issue of borders."

Olmert remained "committed to continue the efforts to achieve a joint Israeli-Palestinian document" before expiry of the 2008 deadline, despite his intention to resign, the premier's aide said.

But Erekat said "everything is still on the negotiating table, and we haven't agreed on anything yet."

He hinted the leak was aimed at blaming the Palestinians for the failure of the negotiations if they rejected Olmert's reported offer.

According to Ha'aretz, the offer stipulates that Palestinian refugees may return to their future state in the West Bank and Gaza only. Only some may return to Israel for family reunification.

The daily added the Palestinians were given preliminary maps of the proposed borders of their state, which it said run close to Israel's controversial security barrier.

That means Israel would have to uproot some 70 of its 120 formal settlements in the West Bank, in addition to dozens of improvised settler outposts.

The vast majority of the almost 440,000 Jewish settlers living in the West Bank would be able to remain in the blocs located to the west of the barrier and around Jerusalem.

But Israel would nevertheless have to evacuate almost 60,000 Jewish settlers living to the barrier's east - more than seven times the number of settlers it evacuated when it unilaterally withdrew from the Gaza Strip three years ago.

But the evacuation, the transfer of Israeli land near Gaza to the Palestinians and the opening of the West Bank-Gaza free passage would only be implemented after the Abbas' Ramallah-based administration regains control of the Hamas-ruled Gaza Strip.

In the meantime, Israel would be able to continue to build in the settlement blocs on its side of the agreed-on border.