JERUSALEM (AFP) - Israeli Prime Minister Ehud Olmert has offered a peace plan giving the Palestinians 93 per cent of the occupied West Bank, an Israeli newspaper said on Tuesday. But the Palestinians denied the report. Israel's Haaretz newspaper said the proposed border is at the heart of a broader plan that would compensate the Palestinians with the equivalent of 5.5pc of the West Bank adjacent to the Gaza Strip and a route connecting Gaza to the West Bank itself. However, Palestinian President Mahmud Abbas would only receive the land and the overland connection once his forces retake the Gaza Strip from the Hamas movement, which seized power in the coastal territory in June 2007, the newspaper said. But Palestinian negotiator Saeb Erakat said the report was "baseless." "These are half-truths used by Israelis as a test balloon so they can blame the Palestinian authority should the negotiations fail," Erakat told AFP. Haaretz said the proposal has been offered in the context of US-backed peace talks relaunched in November with the goal of resolving the decades-old conflict by the end of the year. The proposed agreement however would be a "shelf agreement" to be implemented in the coming months and years, and would not immediately include the thorny issue of the future status of Jerusalem, Haaretz said. The Palestinians have demanded mostly Arab east Jerusalem, which Israel occupied and annexed in the 1967 Six Day War, as their capital, while Israel considers the entire Holy City its "eternal, undivided" capital - a claim not recognised by the international community. The agreement would however include a complex solution to the Palestinian refugee problem, allowing some refugees from the 1948 war to return to Israel while settling most of the 4.5 million refugees and their descendants in the Palestinian state. The seven per cent of the West Bank annexed by Israel would include the major settlement blocs around Jerusalem - home to most of the 250,000 Israeli settlers in the territory - and some settlements in the northern West Bank. The final Palestinian state would be demilitarised. Erakat dismissed the idea of a partial agreement. "We are not a bazaar," he said. "We want a complete Israeli withdrawal from the territories it occupied in 1967, including Jerusalem, and agreement on all the final status questions," he added. Olmert's spokesman Mark Regev declined to comment on the report but told AFP the "negotiations with the Palestinians are making progress on a number of subjects, particularly borders. "These negotiations are serious and are aimed at a common objective," he added. Meanwhile, Israel launched large-scale military exercises on Tuesday on the occupied Golan Heights along the Syrian border on Tuesday in the presence of senior political and military officials. "There is a reinforcement on the other side, and it's not by chance that we are training intensively on the Golan Heights and on a major scale," Defence Minister Ehud Barak, who observed the drills, told army radio. He was referring to the Lebanese militia Hezbollah, which Israel says has been rearming with help from Syria and Iran since the 2006 Lebanon war, widely regarded in Israel as a failure. Barak said UN resolution which ended the 34-day war "failed to fulfil its goals."