JERUSALEM - Israel's powerful defense minister yesterday called on Prime Minister Ehud Olmert to step down amid a burgeoning corruption scandal and threatened to bring down the government if the Israeli leader does not comply.

The ultimatum was the latest in a string of career-threatening challenges that Olmert has weathered during his two years in office.

If Labor Party leader Ehud Barak carries out his promise to withdraw from Olmert's fragile coalition, new elections could usher in a government opposed to current peace talks with the Palestinians and Syria - and deny President Bush a peace accord before he leaves office.

Israeli prosecutors have been investigating tens of thousands of dollars in campaign contributions that Olmert collected from American donors in the years before he became prime minister in 2006.

Calls for Olmert's resignation gained volume this week after a key witness, U.S. businessman Morris Talansky, testified he had given $150,000 of his own money to Olmert over the years, before he was prime minister. Talansky said the payments helped fund Olmert's expensive lifestyle that included luxury hotels and first-class travel.

Olmert has denied any wrongdoing and promised to resign if indicted.

At a news conference yesterday, Barak said that because of the criminal investigation, Olmert could not focus on peace efforts and Israel's pressing security needs.

"I don't think the prime minister can at the same time lead the government and handle his own affairs," Barak said. "Therefore, acting out of concern for the good of the country. . . . I believe the prime minister must disconnect himself from the day-to-day running of the government."

Barak said Olmert could suspend himself, resign, or even go on vacation.

He promised to consider cooperating with a new leader from Olmert's Kadima Party but vowed to pull Labor out of the government "soon" if Olmert doesn't step aside. Without Labor, Olmert would lose his parliamentary majority, and new elections would probably be forced two years ahead of schedule.

Polls forecast a poor performance for Labor if elections are held now. Polls have signaled that hard-line opposition leader Benjamin Netanyahu, a fierce critic of Olmert's peace overtures, would win. That could deter Barak from following through on his threat to bring down the government.

In Washington, State Department spokesman Tom Casey declined to speculate on what effect a change in Israeli leadership might have on the U.S.-backed peace process.

"I'll leave it to the Israelis to have their own internal political debate and discussions," Casey said. "We are committed to continuing to work with both sides to move the peace process forward."

Olmert's spokesman, Mark Regev, said the prime minister was maintaining his regular schedule. "The prime minister is convinced that as this investigation continues, it will be clearly demonstrated that he did nothing wrong," Regev said.

Olmert, a master political survivor, has weathered repeated scandals throughout his three-decade political career. The new police investigation is the fifth since he was elected, and he also was widely seen to have botched Israel's 2006 war in Lebanon.

If Olmert decides to step aside, his deputy, Foreign Minister Tzipi Livni, would serve as a caretaker. She could then try to keep the coalition together until Olmert officially steps down or is vindicated and returns.

Olmert's other option is to resign. If that happens, his government falls and Israel's ceremonial president, Shimon Peres, would select a lawmaker from Kadima - probably Livni - and give her a chance to form a government without new elections. If she took over from Olmert, she would become Israel's second female prime minister, after Golda Meir.

As for the U.S.-brokered peace process, Olmert and Palestinian Authority President Mahmoud Abbas have set a year-end target for forging the outline of a final agreement. Last week, Olmert also said he was resuming peace talks with archenemy Syria after an eight-year break.

With Olmert embroiled in scandal, however, and the prospect of a Netanyahu government down the road, peace prospects are suddenly murky again.

Even if there were a deep bench of peace-minded politicians behind him, Olmert's personal relationship with his Palestinian counterpart and his direct involvement in talks would be difficult to replicate quickly.

If Olmert is forced out, there will be little time and perhaps even less appetite among all sides to start over. If he hangs on, he would probably be a diminished figure with less political capital to spend selling the unpopular concessions that would be required of Israel under a real land-for-peace settlement.

In a statement yesterday, Abbas said he considered the matter an internal Israeli issue. "We deal with any Israeli government that commits to the peace process," he said.

His aides, however, said they were worried about the effect Olmert's woes will have on peacemaking.