For years the Islamic Movement has waged a campaign to "save" al-Aqsa, the main mosque in the compound in Israeli-occupied and annexed east Jerusalem and the third holiest site in Islam.

The Israeli defence ministry did not immediately comment on Thursday's report and Olmert's office was not available for a response.

Ceasefire threatened

Tensions have flared between Israel and the Palestinians over the Israeli excavation, which started on Tuesday.

Palestinians said a ceasefire in Gaza with Israel could unravel if the work continued.

Ha'aretz said Peretz wrote to Olmert on Wednesday calling for the immediate stop to the work, citing security concerns.

The Fatah faction of Mahmoud Abbas, the Palestinian president, said any damage caused to the mosque by the dig work would "lead to a termination" of a November ceasefire deal operating in Gaza, and spark a "volcano of anger".

Israel say the excavations are part of a search for ancient artefacts beneath the compound, known to Muslims as Haram al-Sharif and to Jews as the Temple Mount, would not harm the sacred site in Jerusalem's walled Old City.

"I turn to Olmert to think anew," Sheikh Abdallah Nimr Darwish, head of Israel's Islamic Movement, told Israel Radio.

"Whoever wants to speak about peace does not excavate anywhere in the area around the holy al-Aqsa mosque," Darwish said, referring to Olmert's planned February 19 peace talks with Abbas and Condoleezza Rice, the US secretary of state.