President Bush flew to Israel yesterday to celebrate the 60th anniversary of the foundation of the Jewish state. But behind the pageantry and warm welcomes were growing signs that his host, Ehud Olmert, the Israeli Prime Minister, could see his political career crumble over corruption allegations.

The state visit was also overshadowed by fresh violence in Gaza, as well as the embarrassing announcement by Mr Olmert’s ultra-religious coalition allies that plans had been approved to expand Jewish settlements on the West Bank.

Mr Bush last visited the region in January to push ahead with the peace process that he has thrown his weight behind. Speaking on the eve of Mr Bush’s visit, Mr Olmert said that he and Mahmoud Abbas, the Palestinian President, had made good progress in key areas, but would not give details.

Such progress could evaporate if the Attorney-General presses on with a criminal investigation into Mr Olmert’s campaign funding almost a decade ago. The Prime Minister, who has survived three similar inquires, says that he will resign if charged this time.

Mr Bush was quick to emphasise before his trip that the future of the negotiations would not depend purely on Mr Olmert. The Israeli Foreign Minister or Defence Minister could take over if Mr Olmert fell foul of the inquiry, Mr Bush said.

Mr Olmert is suspected of having taken hundreds of thousands of pounds in campaign donations from a US businessman, Morris Talansky. Mr Talansky’s lawyer has insisted that all his dealings with Mr Olmert were above board. But Israeli media this week reported that in return for the campaign financing, Mr Olmert allegedly granted Mr Talansky’s business associates special favours in government bids and land zoning permits, making the potential charges against him far more serious. The investigation is putting Mr Olmert under huge strain as he tries to push through peace talks in the face of a fractious coalition, a looming threat from Hezbollah in Lebanon and continuing fighting in Gaza, where Israeli forces killed four Palestinians yesterday – at least one of them a civilian.

Despite a renewed warning from Mr Olmert that Israel could throw its full military might against Hamas, only hours later a Palestinian rocket hit the southern city of Ashkelon, causing serious damage to a shopping mall and wounding several people, one of them a child listed as critical.

Hopes for a deal with the more moderate Palestinian administration in the West Bank also suffered a blow when Shas, the ultra-Orthodox party that holds several key seats in Mr Olmert’s Government, announced the construction of about 600 new housing units in Jewish settlements in the West Bank, a move likely to infuriate the Palestinian leadership.

Salam Fayyad, the technocrat Palestinian Prime Minister negotiating with Israel, sent a reproachful birthday message to the Jewish state ahead of its anniversary. “I say to the Israeli people in particular, how can you celebrate while the people of Palestine are groaning under your settlements, the crimes of your settlers, the siege of your state and the occupation practices of your army?” Mr Fayyad said in a speech.

Facing such hurdles, the United States has toned down the optimism that marked Mr Bush’s last visit, when he predicted that a peace agreement would signed by the end of this year.

Condoleezza Rice, the US Secretary of State, who has been a driving force behind the renewed peace efforts, said before this trip that striking a deal “might be improbable but it’s not impossible”. While Mr Bush was celebrating Israel’s anniversary, the Palestinians were marking what they call the Naqba, or disaster, of 1948, when hundreds of thousands of Palestinian Arabs fled their homes during the war that accompanied Israel’s birth.

Demonstrators plan to release more than 20,000 black balloons to darken the skies today. Meanwhile, Mr Bush has been urged to push Israel to ease its blockade of the Gaza Strip.

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