PARIS (Reuters) - Israel and the Palestinians have never been so close to a peace deal, Israeli Prime Minister Ehud Olmert said on Sunday after talks with Palestinian President Mahmoud Abbas and French President Nicolas Sarkozy.

Olmert, talking up peace prospects as he clings to office in the face of new corruption allegations, told reporters problems still had to be overcome between the two sides and that it was time to make tough decisions.

"It seems to me that we have never been as close to the possibility of reaching an accord as we are today," he said, standing along Abbas and Sarkozy at a news conference.

"It seems that we have reached the time when the Palestinian authorities and the Israelis have to take serious and important decisions that will finally take us to where we have never been before," Olmert added, without giving further details.

Olmert and Abbas launched U.S.-sponsored peace negotiations last year with the stated aim of achieving an agreement before President George W. Bush leaves office next January. But progress has been stymied by violence and mutual recrimination.

Israeli media reports said that at their Paris meeting, Olmert told Abbas he planned to release Palestinian prisoners.

Asked to comment, Olmert's spokesman, Mark Regev, said: "The prime minister is in favour of a release that would be above and beyond what would take place in the framework of the hostage negotiation." Regev did not mention numbers or dates.

Israel is pursuing, through Egyptian mediation, a prisoner exchange deal with Hamas Islamists in the Gaza Strip, where an Israeli soldier has been held since 2006. Israel and Lebanon's Hezbollah group are to carry out a prisoner swap on Wednesday.

PEACE HOPES

Sarkozy visited Israel and the occupied West Bank last month as part of efforts to facilitate the negotiations and repeated on Sunday that Europe and France were ready to help out.

Abbas welcomed the French intercession and voiced hope "that we can arrive at peace within a number of months".

Speaking through an interpreter, he told the news conference: "We have started detailed negotiations with Mr Olmert. .. We are totally serious. Both of us are serious."

Olmert and Abbas were in Paris to take part in a summit of EU and Mediterranean leaders organised by Sarkozy. Also present was Syrian President Bashar al-Assad, who has been holding indirect, Turkish-mediated peace talks with Israel.

Olmert said he would like to see direct engagement with the Syrians but that this would not be at the cost of the Palestinian track, "which is of utmost importance to us".

He also said he wanted to work with Europe and the United States "to avoid the biggest danger" to Israel, namely Iran's nuclear ambitions. Western countries and Israel, which is widely believed to have the Middle East's only atomic arsenal, suspect Iran is trying to build a nuclear bomb, something Tehran denies.

Olmert's visit to France has been overshadowed back home by a corruption scandal. Already suspected of illegally receiving $150,000 from a U.S. businessman, Olmert was hit by new police allegations on Friday of fraud over travel expenses.

He has denied any wrongdoing.

Underlining the importance given to the growing scandal, Israel Radio broke away from live coverage of his comments in Paris to interview a legislator from his main coalition partner about the latest suspicions.

Olmert's upbeat tone on the prospects for peace stood in stark contrast to a gloomy assessment by French Foreign Minister Bernard Kouchner earlier this weekend.

"There is a wind of hope somewhere and I'm sorry to say the talks between the Israelis and the Palestinians are not part of this wind of hope for the time being," he said on Saturday.