The investigation, which emerged last week, has cast a new cloud over the embattled prime minister and raised questions about his ability to negotiate a final peace agreement with the Palestinians.

It also threatens to embarrass him as the country marks its 60th anniversary of independence on Thursday. Dozens of world leaders, including President George W. Bush, are scheduled to join celebrations next week.

An Israeli court has barred publication of most details of the case. But a court statement Tuesday said police and prosecutors have submitted a request "to take testimony from a foreign resident." It did not identify the witness.

The statement said the request does not mean Olmert or his former office manager, Shula Zaken, will be indicted. She was suspended from her job last year while police investigate her for possible involvement in a separate bribery case in Israel's tax authority.

She was allowed to return to a lower-level job at the office Jan. 1, but in light of the latest suspicions, has been placed under house arrest at least until the end of the week.

The court did not make a decision Tuesday on whether the foreign witness would be called. Zaken's lawyer, Micha Fettman, said a decision would probably come next week.

Olmert lawyer Eli Zohar said that the foreign witness is in Israel. He said that if the prosecutors' request is approved, the witness would not testify for some time while lawyers prepare for the questioning.

Olmert has been suspected in a series of scandals throughout his three-decade political career, but never been convicted.

The current case is the fifth police investigation against him since he became prime minister in 2006. The investigation came to light last week after police swooped into his home and questioned him for 90 minutes "under caution," an indication under Israeli law that an indictment could be forthcoming.

Olmert's spokesman, Mark Regev, said the prime minister remains "very focused" on his agenda. With U.S. backing, Olmert and Palestinian President Mahmoud Abbas have set a year-end target for reaching a historic peace deal.

But the investigation could limit Olmert's ability to pursue that agenda.

The case has sparked new calls for him to resign or suspend himself, including from some junior members of his coalition. Even if Olmert stays in office, he is unpopular with the general public and could have a tough time rallying support for a bold initiative.

In another sign of trouble for Olmert, the Haaretz daily published a magazine article on Tuesday claiming that while he was trade minister in 2005, Olmert used government funds to promote his wife's art career.

The article said that Olmert spent the equivalent of more than more than U.S.$11,000 to fly his wife Aliza, himself, bodyguards and other aides to New York for an exhibition. It said the entourage stayed in a luxury hotel, and Olmert used official stationery to invite a series of VIPs, including Secretary of State Condoleezza Rice, Rudy Giuliani, New England Patriots owner Robert Kraft and actor Billy Crystal, to the event. It said Mrs. Olmert sold at least four pieces at the equivalent of U.S.$500 to U.S.$1,000 each.

The prime minister's office said Olmert paid for his family's expenses, and the government paid for the bodyguards under standard procedure. A pro-Israel advocacy group, Media Watch International, covered the lodging expenses.

Olmert's legal problems are just one of many obstacles facing the peace negotiators.

Both Israel and the Palestinians have failed to enact basic trust-building measures set out by the United States. Israel has failed to dismantle West Bank roadblocks, halt settlement activity, or call off military raids in cities where Abbas is deploying his own forces.

The Palestinians, while stationing police in key cities to keep down crime gangs, have done little to dismantle what Israel calls "the terrorist infrastructure" of Hamas and Islamic Jihad.

Abbas, meanwhile, has seen his popularity plummet because of the lack of visible progress, and the 73-year-old leader's health was called into question after he underwent a sudden heart test last week.

Even if the parties could overcome these obstacles, there is the issue of Hamas' control of the Gaza Strip. The Islamic militant group's takeover of Gaza makes implementing any peace deal extremely problematic.

While negotiating with Abbas, Israel frequently battles militants in Gaza who fire rockets into southern Israel. Olmert himself has said no deal will be implemented until Abbas regains control of Gaza.

Enlarge By Jim Hollander, AFP/Getty Images Israeli Prime Minister Ehud Olmert takes the podium to speak at a ceremony Tuesday honoring Israel's fallen soldiers. A corruption probe into Olmert's activities is gaining steam, officials say.

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