The embattled premier, under fire over the war in Lebanon and facing possible corruption probes, said the so-called realignment plan -- the main platform under which his Kadima party narrowly won parliamentary elections in March -- was no longer a priority.
"At this moment the question of realignment is not on our priority list the way it was two months ago," Mr Olmert was quoted as telling the parliamentary defence and foreign affairs committee by a Knesset official.
"I have no doubt that something has changed in the priorities I thought we had, and Israel's priorities have changed also when dealing with the Palestinian problem."
Mr Olmert's centrist Kadima party won a narrow election victory on March 28 in a de facto referendum on his ambitions to withdraw from most of the West Bank but effectively to annex the largest Jewish settlements to Israel.
Tens of thousands of Jewish settlers would have been uprooted in the project that was seen as a direct successor to last year's pullout from the Gaza Strip conducted by former prime minister Ariel Sharon, after a 38-year occupation.
Palestinians had slammed the plan because it would have put large parts of their promised future state under Israeli control, and because they say only negotiations -- not unilateral steps -- can resolve the Middle East conflict.
But Mr Olmert insisted Israel had "no interest in running away" from the Palestinian issue, saying "I think we must face the issue and think of other ways" to deal with it, namely dialogue with Mr Abbas.
"I want and intend to hold a dialogue with Abu Mazen (Mahmoud Abbas)" said Mr Olmert. "We have no problem that is more urgent than the Palestinian problem."
Mr Olmert last met Mr Abbas at an informal breakfast hosted by Jordan's King
Abdullah II on June 22 in Petra, in the first top-level Israeli-Palestinian meeting for a year, amid stalled efforts to reignite the peace process.
In response, chief Palestinian negotiator Saeb Erakat told news agency AFP that Abbas and the Palestinian Authority "are always ready to negotiate" with Israel toward reaching a settlement.
"Reaching peace through negotiations is our strategic option. Unilateral solutions will lead neither to peace nor security in the region," he said.
Shalit’s release sought
But Mr Olmert said Gaza militants would have to release the Israeli soldier they seized in a cross-border raid on June 25 before some of the main issues between Israel and Palestinians could be dealt with.
"As long as Gilad Shalit is not returned I will not deal with the release of prisoners," Mr Olmert said.
"I have said in the past, before the kidnapping, that within the framework of talks between us I was ready to release Palestinian prisoners."
The three groups that claimed the abduction, including the armed wing of the ruling Islamist Hamas movement whose government is boycotted by Israel and the West, demand the release of Palestinian prisoners in exchange for Corporal Shalit.
The Jewish state has demanded the 20-year-old corporal's unconditional release, but local media have reported that negotiations are underway through Egypt as an intermediary.
But Mr Olmert denied reports of an impending deal that would see Israel release Palestinian prisoners in exchange for a soldier captured by militants in the Gaza Strip.
"All the publications and information about the possible release of the kidnapped soldiers are false," a member of parliament's defence and foreign affairs committee quoted the premier as telling the committee.
The liberal Haaretz newspaper quoted Mr Olmert as telling ministers more than two weeks ago that talk about the US-endorsed realignment plan was no longer "appropriate" after the Lebanon war, which cost Israel US$5.7 billion.
Commentators started to predict the doom of the West Bank pullouts when Israel returned troops to the Gaza Strip in June following Corporal Shalit's capture, and again after war broke out with Hezbollah in July.
Both conflicts erupted despite Israeli withdrawals from south Lebanon in 2000 and Gaza in 2006. Their failure to restore calm strengthened the resolve of those opposed to further unilateral pullouts from occupied land.
The realignment plan took a further knock when former justice minister Haim Ramon, a vocal proponent of the project and close Mr Olmert aide, resigned last month amid charges of sexual harassment.