JERUSALEM (AFP) — Israel's Prime Minister Ehud Olmert announced on Wednesday he would step down in September after a party leadership vote, announcing the end of a premiership dogged by graft investigations.

"After the election of my successor I will step down to allow a government to be formed rapidly," he said, after declaring he would not run in the centrist Kadima party election due in mid-September.

The surprise announcement marks the apex of a political storm raised after police launched an investigation in May over suspicions he had accepted vast sums of money from a US businessman in order to finance elections campaigns and a lavish lifestyle in the 13 years before he became premier in 2006.

It also casts a long shadow on peacemaking efforts with the Palestinians and with Israel's longtime foe Syria.

Olmert, 62, who has been premier since 2006, has admitted he had accepted money from Morris Talansky in the latest corruption probe against him, but has denied any wrongdoing.

State Prosecutor Moshe Lador last week said that he would decide whether to indict Olmert over the Talansky affair "very soon."

Talansky said in his May testimony that he had given Olmert cash-stuffed envelopes on multiple occasions to cover expenses for his stays in the United States and pay for his election campaigns as Jerusalem mayor and Likud MP.

In a fierce cross-examination earlier this month Olmert's lawyers called Talansky a liar and uncovered several contradictions in his testimony but the 75-year-old Jewish-American financier insisted his overall story was accurate.

The latest investigation led local media and opposition parties to renew their calls for the resignation of Olmert, who is currently facing a total of six corruption probes.

It sparked similar calls from within his fragile governing coalition and his centrist Kadima party.

Last month Labour party chief Ehud Barak, a key coalition partner, pushed Olmert to schedule an unprecedented party primary by threatening to support a bill to dissolve parliament.

Foreign Minister Tzipi Livni is widely viewed as a front-runner in the party election slated for September, but Transport Minister Shaul Mofaz and Public Security Minister Avi Dichter are also expected to compete.

Olmert's departure could further affect already slow-moving US-backed peace talks with the Palestinians relaunched in November with the goal of resolving the decades-old conflict by the end of the year.

Many believed that Olmert's warm friendship with George W. Bush and the US president's strong support for Israel would allow the Jewish state to make greater concessions to the Palestinians.

His departure could also derail indirect talks with neighbouring Syria relaunched earlier this year under Turkish mediation.

Olmert took over as prime minister from his mentor Ariel Sharon in January 2006 after Sharon fell into a deep coma. He then led Kadima to victory in parliamentary elections in March of that year.

His government was plunged into turmoil that summer however when Israel fought Lebanon's Hezbollah militia to a bloody 34-day stalemate widely viewed as a failure in Israel.

The war led to the resignation of then defence minister Amir Peretz and army chief Dan Halutz and saw mounting calls for Olmert to follow suit, but the premier endured even when his approval ratings hit single-digit record lows.

Although Olmert rejected peace talks with the Palestinians for decades, he underwent a late-career conversion, embracing Sharon's policy of unilateral withdrawal from Palestinian territory and then entering full peace talks.