(Adds Gaza fuel shortage, paragraphs 13-14)

By Ori Lewis

JERUSALEM, Dec 2 (Reuters) - Israeli Prime Minister Ehud Olmert on Sunday played down expectations for a peace deal with the Palestinians before the end of 2008 as laid out at a U.S.-sponsored peace conference last week.

"We will make an effort to hold speedy negotiations in the hope we may conclude by the end of 2008, but certainly there is no commitment for a firm timetable for their completion," Olmert said at the start of Sunday's Israeli cabinet meeting.

U.S. President George W. Bush assured Israeli and Palestinian leaders at the conference in Annapolis, Maryland, that Washington would actively engage in peacemaking, despite deep scepticism over chances for a deal before he leaves office.

Launching the first formal peace talks in seven years at the conference, Olmert and Palestinian President Mahmoud Abbas agreed to try and reach a deal on creating a Palestinian state in Gaza and the West Bank by the end of next year.

But sceptics say Bush's time scale for peacemaking is too ambitious given both leaders are politically weak. Speaking at the first cabinet meeting since Annapolis, Olmert urged caution.

In an apparent hint to right-wing coalition partners that he was not planning concessions without a reciprocal move from the Palestinians, Olmert said any progress on peace would depend on adhering to commitments under a stalled U.S. peace "road map".

"The most important thing in the joint statement is that ... any agreement that we reach in the future will be dependent on completion of all road map commitments.

"In other words, Israel will not have to implement any commitment which emanates from the agreement before all the road map commitments have been met," he said.

The 2003 U.S. road map provides benchmarks that include a freeze of Jewish settlement activity in the West Bank, occupied by Israel since the 1967 Middle East war, as well as a Palestinian crackdown on militants.

GAZA MILITANTS

Israel will release about 430 Palestinian prisoners on Monday as part of efforts to bolster Abbas against Hamas Islamists, who seized the Gaza Strip in June and have rejected the peace drive, vowing to keep fighting the Jewish state.

Israel regularly launches raids into Gaza to try to stop militants firing rockets onto Israeli towns and said on Sunday it had stepped up attacks in the coastal strip in the past week.

A statement said Defence Minister Ehud Barak told ministers he had authorised more military action in Gaza, including the targeting of "manned military Hamas targets". Barak said Israel had killed 22 militants in attacks in the past week.

Since Israel began reducing the amount of fuel allowed into the coastal strip last month, in response to the rocket salvoes, most Gaza petrol stations have closed and traffic has almost come to a halt.

"Cooking gas will run out within days and cars will stop within hours," said Mahmoud al-Khuzundar, chairman of the society of petrol company owners, on Sunday.

Olmert's comments playing down hopes of a quick deal came after the United States withdrew a draft United Nations resolution endorsing action agreed at Annapolis -- a document Israeli officials said they felt was inappropriate.

Although Israel apparently had no problems with the uncontroversial text, analysts suggested it was worried a formal resolution would get the U.N. too involved in Middle East peace efforts. Israel and the United States often complain of bias in the world body against the Jewish state. (Additional reporting by Nidal al-Mughrabi in Gaza, Writing by Ori Lewis and Rebecca Harrison; Editing by Matthew Tostevin)

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