Israel's powerful defense minister on Wednesday called on Prime Minister Ehud Olmert to step down amid a burgeoning corruption scandal and said he would bring down the government if the Israeli leader does not comply.

The ultimatum was the latest in a string of career-threatening challenges that Olmert has weathered during his two years in office. But the threat from Labor Party leader Ehud Barak could well be the one that brings him down.

If Barak carries out his promise to withdraw from Olmert's fragile coalition, new elections could usher in a government opposed to current peace talks with the Palestinians and Syria.

Israeli prosecutors have been investigating tens of thousands of dollars in campaign contributions that Olmert collected from American donors in the years before he became prime minister in 2006.

Calls for Olmert's resignation gained volume this week after a key witness, U.S. businessman Morris Talansky, testified he had given $150,000 of his own money to Olmert over the years, before he was permier. Talansky said the payments, often in cash-stuffed envelopes, helped fund Olmert's expensive lifestyle that included luxury hotels and first-class travel.

Olmert has denied any wrongdoing but promised to resign if indicted.

At a news conference, Barak said because of the criminal investigation, Olmert could not focus on peace efforts and the country's pressing security needs.

"I don't think the prime minister can at the same time lead the government and handle his own affairs. Therefore, acting out of concern for the good of the country ... I believe the prime minister must disconnect himself from the day-to-day running of the government," Barak said.

He said Olmert could suspend himself, resign or even go on vacation.

He promised to consider cooperating with a new leader from Olmert's Kadima Party, but vowed to pull Labor out of the government "soon" if Olmert doesn't step aside. Without Labor, Olmert would lose his parliamentary majority, and new elections would probably be forced two years ahead of schedule.

In Washington, U.S. State Department spokesman Tom Casey declined to speculate on the possible effect of a change in Israeli leadership on the U.S.-backed peace process.

"I'll leave it to the Israelis to have their own internal political debate and discussions," Casey said Wednesday. "We are committed to continuing to work with both sides to move the peace process forward, and that's what we're going to continue to do."

Olmert's spokesman, Mark Regev, said the premier was maintaining his regular schedule. "The prime minister is convinced that as this investigation continues, it will be clearly demonstrated that he did nothing wrong," he said.

Olmert held a series of meetings Wednesday, including a session with the visiting Maryland Gov. Martin O'Malley. "He seemed his usual relaxed and charming self. He seemed focused and very much looking toward the future," O'Malley told The Associated Press.

Olmert — a canny and capable politician — could still hang on. In Israel's frenetic news environment, headlines fade quickly in the public consciousness as they are overtaken by events, which could work in Olmert's favor.

Olmert, a master political survivor, has weathered repeated scandals throughout his three-decade political career. The new police investigation is the fifth opened into his affairs since he was elected, and he was widely seen to have botched Israel's 2006 war in Lebanon.

In the aftermath of that war, Barak issued an ultimatum similar to the one he issued Wednesday but never followed through. Doubts about Barak's credibility appeared to be Olmert's best hope for survival.

"Barak's comments fit the public mood and fit what his voters want him to say, but whether he will act on anything is a different question," said Asher Arian, a fellow at the Israel Democracy Institute.

Polls forecast a poor performance for Labor if elections are held now. Polls have signaled that hardline opposition leader Benjamin Netanyahu, a fierce critic of Olmert's peace overtures, would win. That could deter Barak from following through on his threat to bring down the government.

If Olmert decides to step aside, his deputy, Foreign Minister Tzipi Livni, would serve as a caretaker. She could then try to keep the current coalition together until Olmert officially steps down or is vindicated and returns.

Olmert's other option is to resign. If that happens, his government falls and Israel's ceremonial president, Shimon Peres, would select a lawmaker from Kadima — probably Livni — and give her a chance to form a new government without new elections.

In recent months, Livni has emerged as one of Israel's most popular politicians. If she takes over from Olmert, she would become Israel's second female prime minister, after Golda Meir.

But Livni faces other rivals for the Kadima leadership who will certainly try to oust her once Olmert is gone. With no one else in a strong position to form a majority coalition in the fragmented 120-seat parliament, that would likely set the stage for new elections.

Livni and other Kadima leaders remained conspicuously silent Wednesday, although one junior Kadima lawmaker, Amira Dotan, urged Olmert to resign.

"Kadima is in a leadership crisis that has to be solved," she said.

Olmert is the latest in a long line of Israeli leaders plagued by scandal. Former Prime Minister Ariel Sharon was accused of campaign funding violations, as was Barak himself when he was prime minister in 2000. Israeli President Moshe Katsav was forced to resign in June 2007 under a cloud of rape and sexual assault charges.

With U.S. backing, Olmert and Palestinian President Mahmoud Abbas have set a year-end target for forging the outline of a final peace deal. Last week, Olmert also said he was resuming peace talks with archenemy Syria after an eight-year break.

With Olmert embroiled in scandal, however, and the prospect of a Netanyahu government down the road, peace prospects are suddenly murky.

In a statement, Abbas said he considered the matter an internal Israeli issue. "We deal with any Israeli government that commits to the peace process." Abbas's aides, however, say they are worried about the effect Olmert's woes will have on peacemaking.

In Israel, Talansky's dramatic courtroom testimony painting Olmert as a money-loving politician with a fondness for the good life dominated Wednesday's headlines. Olmert's lawyers are scheduled to cross-examine Talansky on July 17.

The testimony exposed a dark side of the close alliance between Israeli leaders and wealthy American Jews.

Many U.S. Jews donate to Israeli charities and causes, and some — like Talansky — go further, giving directly to Israeli politicians or political movements they identify with.

Israel is a small country where fundraising opportunities are limited, and some politicians have found that Israel's supporters abroad are a potentially lucrative alternate source of money. Foreign donations are not illegal, but prosecutors suspect Olmert may have exceeded legal limits or even accepted bribes.

Talansky, 75, said he never received anything in return for the money. He said he was motivated by an admiration for Olmert.

Commentators said that while there was no clear evidence of criminal activity, the moral implications were troubling. In a headline, the Yediot Ahronot daily described Olmert's high-flying lifestyle as "disgusting."