Kofi Annan, the United Nations Secretary-General, has called for all Israeli troops to be withdrawn from southern Lebanon as soon as an international force earmarked for the area reaches 5,000.

In a fresh demand at a Jerusalem press conference this morning, Mr Annan told Ehud Olmert, the Israeli Prime Minister, that he expects Israeli troops "would fully have withdrawn" by the time that number of troops are assembled, which he said he would be pushing for "in the coming days and weeks".

Under UN Resolution 1701, signed earlier this month and agreed by both Israel and Lebanon, provision was made for a international force of 15,000 to act as a buffer between Israel and Hezbollah, the Shia militant and political group which is based in southern Lebanon and has launched numerous rocket attacks against the Jewish state.

So far, approximately 2,500 UN troops are based in the country, 2,000 of which are observers who were already there before the conflict started. Discussions are continuing among mainly European Union countries over how many more each will send.

Mr Annan also demanded a swift end to the air and sea blockade of Lebanon by Israel, which the Lebanese government complains is preventing the arrival of supplies and the recovery of its economy. The UN Secretary-General claimed that the Lebanese authorities yesterday assured him they were taking measures to stop the flow of weapons from Syria and Iran to their ally Hezbollah via sea and air, and that he believed Israel's security concerns could be addressed.

"In the meantime, I do believe the blockade should be lifted," Annan said. He added: "I had serious discussions with the Lebanese leadership and I am really convinced that they are serious about implementing Resolution 1701 in its entirity."

Mr Olmert did not respond specifically to Annan's demands for withdrawal and to stop the blockade, only agreeing that the cease-fire deal must be fully implemented. The Israeli Prime Minister's popularity has plummeted in the aftermath of the recent conflict, with widespread criticism of his Army's tactics, which failed to wipe out Hezbollah and caused widespread civilian casualties through extensive air-raids.

The Israeli leader made a new strategic move in calling for direct negotiations with the Government of Lebanon - a move which, if successful, could be the first formal contact between the two Governments since Israel's formation in 1948.

This is regarded as highly unlikely, however, because of the strength of Hezbollah within Lebanon, labelled by some as "a state within a state". The Islamist militia has its own powerbase within Lebanon, including two Cabinet Ministers in the Lebanese Government, and is funded and trained by Syria and Iran, both of which are staunchly anti-Israel and are regarded by the US as 'rogue-states'.

Mr Annan was speaking as he completed the second leg of his Middle Eastern tour, following a visit to war-ravaged Lebanon yesterday. Earlier today Mr Annan and Mr Olmert held private talks, and there was a further meeting between Mr Annan and the families of the two Israeli soldiers kidnapped by Hezbollah.

The UN Secretary-General will conduct talks with Iran and Syria in the coming days but, this afternoon, headed to the Palestinian territories for talks with President Mahmoud Abbas.

Calling for a full Israeli withdrawal when troop levels reach 5,000, Mr Annan said that he was intensifying negotiations between European countries to bring about the extra troops.

"We are going to double the number, and get to 5,000 in the coming days and weeks," he said. "I hope that, as we do, that the Israeli withdrawal will continue and by the time that are at that level, Israel would fully have withdrawn."

Mr Olmert said that the ceasefire agreement could be a chance for a "new reality" between Israel and Lebanon, in which the two governments could establish diplomatic relations for the first time since 1948.

"We hope that conditions will change ... to allow contacts between the Government of Israel and the Government of Lebanon," the Israeli Prime Minister said.

He added that "the most important" aspect to implementing Resolution 1701 would be for Hezbollah to release its two captured Israeli soldiers, the kidnap of which sparked the conflict in mid-July. It is widely believed that Israel is unlikely to end its blockade at least until the soldiers have been released, in case they are moved out of Lebanon.

Later, Mr Annan met with Tzipi Livni, the Israeli Foreign Minister. During a further press conference in which both read out five-minute statements, he backed Mr Olmert's earlier call that this could be an opportunity to "settle the differences between Israel and Lebanon once and for all".

However, this afternoon, a Hezbollah Cabinet Minister appeared to deal the fragile ceasefire a blow by saying that the guerrilla group would not release two captured Israeli soldiers unconditionally, and that they would only be freed in a prisoner exchange.

"There will be no unconditional release. This is not possible," Mohammed Fneish, who as Minister of Energy and Hydraulic Resources is one of two Hezbollah representatives in the Lebanese Cabinet.

"There should be an exchange through indirect negotiations. This is the principle to which Hezbollah and the resistance are adhering."

Mr Annan this afternoon met Mr Abbas. The worsening hardships in the Palestinian territories, following an international boycott of the Hamas government, and the fate of an Israeli soldier held by Hamas-allied militants, was on the agenda at the West Bank meeting.

Meanwhile, the European Commission announced it was setting aside €42 million (£28.4m) at tomorrow's conference in Stockholm to raise money to rebuild Lebanon. The Brussels money will be in addition to the €50 million (£33.8m) that the European Union's head office has already earmarked for emergency relief to Lebanon.