Israeli police investigators began questioning Prime Minister Ehud Olmert on Friday for a third time over allegations he took bribes from an American businessman.

The scandal, which police and judicial sources say involves hundreds of thousands of dollars in questionable cash payments over a decade from the early 1990s, broke two months ago when detectives moved at short notice to question Olmert on May 2.

The case could force him from office and hamper U.S.-backed peace talks between Israel and the Palestinians.

Olmert said he did nothing wrong in his dealings with New York Jewish fundraiser Morris Talansky but has promised to step down if indicted.

Israeli investigators have also travelled to the United States to seek evidence.

In testimony on May 27, Talansky told the Jerusalem District Court that he had passed $150,000 to Olmert over a 15-year period, including loans that were never repaid. Olmert said the money was used legally to fund election campaigns.

Olmert's lawyers plan to cross-examine Talansky starting on July 17 in court hearings expected to last several days.

Olmert averted a coalition crisis over the affair when he agreed to hold a party leadership election after Defence Minister Ehud Barak's Labour Party, Olmert's main partner in the government, called on him to step aside.

On Thursday, the Kadima party confirmed that it would hold a leadership election in September which Olmert's deputy, Foreign Minister Tzipi Livni, appears favoured to win, a newspaper survey showed on Friday.