(Corrects attribution of quotes in paragraphs 9, 11 and 12 to Minister of Pensioner Affairs Rafi Eitan. Removes references to Defence Minister Amir Peretz) By Ari Rabinovitch JERUSALEM, Dec 24 (Reuters) - Israeli Prime Minister Ehud Olmert suggested on Sunday he could release some Palestinian prisoners this week even though Gaza militants have yet to free a captured Israeli soldier. Israel has been under U.S. and European pressure to take steps to bolster Palestinian President Mahmoud Abbas of Fatah after he called early elections against his Hamas rivals. Yuval Diskin, chief of Israel's Shin Bet intelligence service, said that Abbas has no way of enforcing policies in the Palestinian territories and that Fatah would lose in the coming elections, a cabinet source said. At their first formal meeting on Saturday, Olmert pledged $100 million in withheld tax revenues to Abbas, bypassing the Hamas-led government. Many Palestinians were sceptical the money would materialise and feared it would only widen the divide between Fatah and Hamas, which took control of the Palestinian Authority in March after beating Fatah in parliamentary elections. Three senior Israeli cabinet ministers supported the idea of releasing some prisoners as a gesture to Abbas before a Muslim holiday that starts later this week. A cabinet source said Olmert responded to the proposal by saying: "The time has come for flexibility and generosity, and it (Israeli policy) could be different than what has been said in past meetings." Israel had previously ruled out any prisoner releases until Gaza militants freed Israeli soldier Gilad Shalit, who was captured in a cross-border raid in June. Comments by Minister of Pensioner Affairs Rafi Eitan, a former operative of the Mossad security force, also suggested a possible change in Israel's longstanding refusal to consider releasing Palestinian leader Marwan Barghouthi from jail as part of an eventual prisoner exchange for Shalit. Barghouthi, a popular member of Abbas's Fatah faction, was jailed by an Israeli court for five life terms for ordering attacks as part of the Palestinian revolt against occupation. He denied the charges. Asked by Israel Radio if Israel would free Barghouthi, Eitan said: "If someone puts a request to release him from prison on the agenda, it should be discussed in accordance with the law." "It's a question of what you would get in return," he added. In the past Israel has opposed freeing inmates with "blood on their hands", but lately it has signalled more flexibility. Israel has previously freed some Palestinian prisoners as a holiday gesture. At least 10 Palestinians have been killed in violence between forces loyal to Abbas and those of Hamas since Abbas's call last week for new elections in the Gaza Strip and occupied West Bank after talks on a unity government with Hamas failed. FATAH'S BEST CHANCE? Barghouthi, 47, is seen by many as Fatah's best chance in any presidential race against Hamas if Abbas decides not to run. Saturday's meeting in Jerusalem was seen as a bid to boost Abbas's standing against Hamas, whose government has faced a Western economic boycott over its refusal to recognise Israel, renounce violence and abide by interim peace deals. Abbas faces a difficult balancing act in trying to persuade Palestinians, hard hit by the sanctions, to support his peace agenda without appearing beholden to U.S. and Israeli interests. But at their meeting on Saturday, Abbas appeared to make little headway on a key issue for Palestinians -- the release of some of the 11,000 Palestinian prisoners held by Israel. Hamas leaders scoffed at the results of Abbas's meeting with Olmert. Mushir al-Masri, a senior Hamas lawmaker, said Abbas had set a "serious precedent" by agreeing with Israel that it would funnel the $100 million through his office, rather than through the Hamas-run treasury. "The meeting gave the enemy a right they shouldn't have," al-Masri said. Zakaria al-Qaq of al-Quds University said Israel's $100 million pledge might give Abbas a "modest boost", but would not shift the minds of the Palestinian public. "We have kisses without results," said Ibrahim Mohammad, a Gaza shopkeeper. "The kisses and the warm reception serve only one purpose: deepening the Palestinian-Palestinian division." (Additional reporting by Allyn Fisher-Ilan in Jerusalem; Nidal al-Mughrabi and Mohammed Assadi in Gaza; and Wafa Amr in Ramallah)
