President George W. Bush, in the Middle East to encourage struggling Israeli-Palestinian peace talks, has emphasized historic ties with Israel saying the United States was its "oldest and best friend in the world."

Bush, in Jerusalem to commemorate the 60th anniversary of Israel's creation, will visit the Roman-era desert fortress of Masada and give a speech to parliament on Thursday.

Before making his second trip this year and also of his presidency to Israel, Bush had expressed hope that a peace accord could be reached by the time he leaves office in January, despite obstacles that have cropped up since promises were made in Annapolis, Maryland, last November.

In the latest setback to a deal with Palestinian President Mahmoud Abbas, Israeli Prime Minister Ehud Olmert has been urged to resign over suspicions he took bribes from a U.S. businessman.

Olmert has denied wrongdoing but has pledged to resign if indicted, and this could delay any peace accord.

Violence around the Gaza Strip still hampers peace efforts. A rocket fired from Hamas-controlled Gaza struck a shopping mall in the southern Israeli city of Ashkelon and wounded several people on Wednesday as Bush and Olmert met in Jerusalem.

An Israeli air strike later killed two Hamas fighters.

The White House condemned the attack and blamed Hamas, which the United States considers a terrorist organisation.

Hamas says it aims to destroy Israel, replacing it with an Islamic state also embracing the West Bank and Gaza. But it has also offered Israel a conditional ceasefire.

In his address to the Knesset, Bush will reiterate that the United States was and remains Israel's closest friend and ally.

"The United States and Israel share a belief that all people have the right to live in peace, that democracy is the best way to ensure human rights, that religious liberty is fundamental to civilized society and that using violence to achieve political objectives is always wrong," White House spokesman Gordon Johndroe said, giving a brief preview of the speech.

HAMAS PLANS MARCH DURING BUSH SPEECH

The event could see fresh confrontations in Gaza, where Hamas urged Palestinians to march on the border and "break the siege" - an Israeli-led embargo that has been stepped up since the Islamists routed Abbas's forces in the enclave last June.

Israel's military garrison at the planned rally point, the border crossing of Erez, was on standby and prepared to use force to repel the Palestinians, a security source said.

At a Wednesday evening tribute to U.S.-Israeli ties and the 60th anniversary of the founding of the Jewish state, Bush appeared moved to tears when Olmert heaped praise on the U.S. president as a strong friend of Israel.

The warm reception was a contrast with American public opinion polls in which Bush's low ratings are partly due to discontent over the Iraq war.

Bush, who in his last months in office is trying to cement a Middle East peace and create a legacy that eluded his predecessors, emphasized the strength of U.S.-Israeli bonds.

"Eleven minutes after Israel came into existence, the United States became the first nation to recognize its independence ... We can say today that America is Israel's oldest and best friend in the world," he said to applause.

Bush will begin Thursday with a visit to the Roman-era fortress of Masada overlooking the Dead Sea.

The site has acquired great significance for Israelis as a symbol of self-sacrifice and resistance, although the widely told story of how nearly 1,000 Jewish men, women and children committed suicide rather than surrender to the Romans is based on a single written source, Jewish historian Josephus Flavius.

"The courage and bravery of those who fought at Masada can be seen in Israelis today, as they celebrate the 60th anniversary of the founding of their nation," White House spokeswoman Dana Perino said.

Johndroe said Washington saw Israel as one of its partners in the fight against "extremists, including Hamas, Hezbollah and al Qaeda as well as (in efforts to) deal with Iran's nuclear weapons ambitions."