Embattled Israeli Prime Minister Ehud Olmert averted a major crisis on Wednesday, reaching agreement with his Labour allies for them to reverse a decision to vote to dissolve parliament, a move that could have brought down the government.

Under the accord, Olmert agreed to a demand that his Kadima party hold primary elections by September 25 and Labour undertook not to back opposition efforts to bring down the government, parliamentary sources said.

The deal between Olmert's centrist Kadima party and Labour, which is headed by Defence Minister Ehud Barak, was reached just hours before the motion to dissolve parliament was to be submitted in a preliminary reading.

Kadima's leadership is now scheduled to meet by July 10 to fix a date for the primaries to choose a party chief, which was expected to pit Foreign Minister Tzipi Livni against Transportation Minister Shaul Mofaz and possibly Olmert.

On Monday, 15 of the 19 Labour MPs had voted in favour of Barak's decision to support the dissolution bill on Wednesday.

Barak had also threatened earlier this month to quit Olmert's coalition government if the prime minister did not resign over allegations he had illegally accepted cash from a US businessman.

Labour is Olmert's key partner in government and without its support the prime minister's fragile coalition would not have the necessary 61 seats for a majority in the 120-member parliament.

Olmert has not ruled out running in the primary, but political analysts doubt he would be able to draw enough support.

"He has lost popular legitimacy," said Hanan Cristal, a political commentator with Israeli public radio.

But he pointed out Olmert did gain time at a crucial moment when Israel is involved in indirect negotiations with Syria and considering prisoner swaps with the Lebanese Hezbollah militia and the Hamas rulers of the Gaza Strip.

The premier has denied any wrongdoing in the latest graft allegations against him but acknowledged receiving campaign donations from US financier Morris Talansky, who last month told a Jerusalem court he had given Olmert envelopes stuffed with cash.

Kadima's leadership meeting could take place just days before Talansky is scheduled to be cross-examined by the prime minister's lawyers.

Olmert on Sunday had warned that any Labour minister who voted in favour of dissolution "would be out of office within 48 hours," a Labour official said.

But Labour's secretary general, MP Eitan Cabel, said then that Labour ministers were ready to lose their jobs and head for early elections.

The current legislature is due normally to run until the end of 2010.