During the conference, Olmert told his British counterpart that Israel "was prepared to pull out from most of the occupied territories for the formation of a Palestinian state."
"We will have to move forward ... To separate from the Palestinians, pull out from areas of the West Bank amd realign Israelis in other parts of Israel in order to leave a very large contiguous territory for a state to be formed by the Palestinians," he said.
Olmert said that Israel's first priority was to hold negotiations with the Palestinians.
"But the Palestinians are fighting with us (and are) missing a great opportunity. What we are offering is a generous compromise, a dramatic change of attitudes and positions. This is a great opportunity for us and the Palestinians to move forward."
He warned, however, that if negotiations did not materialize, Israel would take unilateral steps.
'We have to move forward'
"In spite of our obvious efforts, we may not be able to achieve our primary goal to negotiate with the Palestinians on the principles of the road map. We will have to move forward ... To separate from the Palestinians," Olmert said.
Olmert also addressed the Iranian nuclear threat, saying, "Israel will not tolerate nuclear weapons in the hands of Iran. We will not be able to accept such a reality. It is quite obvious why."
Blair stressed his insistence on a negotiated settlement and insisted such an agreement could be reached.
"If you can get negotiations underway, a solution is possible," Blair said. "The three conditions are laid down for Israel to begin negotiations on a final settlement." The conditions, posed by Israel and the international community to the Palestinians, include Israel's right to exist, Hamas' renunciation of violence and adherence to the road map.
Asked if he advocated negotiations with the militant Hamas leadership, Blair said: "You can only negotiate with people who accept your existence and stop violence. A negotiated settlement is easily, manifestly the best thing. We can't continue indefinitely with what we have at the moment. We need a resolution or everything will slip back into chaos."
The Associated Press contributed to this report