CAMPAIGN FUNDS
In a terse six-minute address, Olmert said Talansky funded his two successful campaigns for mayor of Jerusalem in 1993 and 1998, an unsuccessful bid to lead the right-wing Likud party in 1999 and a further internal Likud election in 2002. He also said the American "helped me cover deficits" after elections.
Earlier, a police statement said: "The investigation deals with suspicions that the prime minister received significant sums of money from a foreigner or number of foreign individuals over an extended period of time."
A police spokesman named Talansky as a key witness, along with Olmert's long-time secretary Shula Zaken, who has been under house arrest, and his former law partner Uri Messer.
One police source said investigators cracked coded notes kept by Zaken that they suspect recorded sums given by Talansky - referred to in some of the jottings as "The Laundry Man".
Palestinian negotiators fear a collapse of Olmert's coalition will scupper hopes for reaching a deal on creating a Palestinian state before Bush leaves office in January.
If Olmert did step down, however, his most likely immediate successor would be his deputy in the centrist Kadima party, Foreign Minister Tzipi Livni. She has been working closely with Washington and Palestinian negotiators on the peace process.
One parliamentarian from Kadima, founded by Sharon and Olmert when they left Likud, said she was "uncomfortable" about the allegations. Ronit Tirosh said, however, she thought Olmert was capable of continuing to lead Israel.
But Gideon Sahar, an ally of Likud leader Benjamin Netanyahu, said: "Olmert is unworthy and cannot carry on in his post. The Kadima government is sunk up to its neck in corruption."
There was no immediate comment from Livni or from Defence Minister Ehud Barak, leader of Olmert's main coalition partner the Labour party. Barak is under pressure from some Labour members to bolt the alliance, but others in the party fear that would trigger an election which Netanyahu could win with ease.
Talansky said in Jerusalem he had given evidence to police after he came to Israel last month to visit relatives for the Passover holiday: "I never was involved in politics," he said, smiling and joking with Israeli reporters.
"Everything is OK. I don't understand what's the big thing."
Official documents show Talansky was treasurer of a charity, the New Jerusalem Foundation, which Olmert set up in 1999. U.S. tax records show this institution declared more than $855,000 (437,000 pounds) in donations from 1999 to 2002.
