Some Arab neighborhoods in Jerusalem could become the capital of a future Palestinian state as part of a final peace agreement, Defence Minister Ehud Barak said in an interview broadcast by Al-Jazeera on Wednesday.
He also said that there was still time for diplomacy to curb Iran's nuclear program but that Israel was serious about using "any option" if that failed.
"We can find a formula under which certain neighborhoods, heavily-populated Arab neighborhoods, could become, in a peace agreement, part of the Palestinian capital that, of course, will include also the neighboring villages around Jerusalem," Barak said.
When asked whether a deal was possible this year, the defense minister answered, "I'm not sure whether the gaps are close enough."
Transportation Minister Shaul Mofaz slammed Barak's readiness to cede the Arab neighborhoods, claiming that "Barak was wrong when he was prime minister and willing to cede territory in Jerusalem and he is wrong today, but at least he has the courage to talk about public opinion."
Israel believes Iran could have a nuclear bomb by 2010 and says an Iranian nuclear weapon would threaten the existence of the Jewish state. Oil-rich Iran denies seeking nuclear weapons and says it is enriching uranium only for use in generating electricity.
The Likud said in response to Barak's statements: "Jerusalem must remain under Israeli sovereignty, both for security reasons and national ones.
"Any territory ceded to the Palestinians will become a base for terrorism, from which they will launch attacks on the rest of the city," the party said in a statement.