By Rebecca Harrison

JERUSALEM, May 9 (Reuters) - Israel is no stranger to corruption scandals -- as police investigate Prime Minister Ehud Olmert on suspicion of taking bribes, his predecessor's son sits in jail for campaign funding misdeeds on his father's behalf.

Olmert has denied any wrongdoing and challenged prosecutors by saying he will resign only if they produce evidence to indict him. Legal and political experts said that, whatever happens, the probe highlights confusion over political finance rules and worries that Israeli democracy is under threat from corruption.

At the Movement for Quality Government (MQG), an Israeli lobby group, Daniel Kayros said on Friday it was too early to comment on Olmert's case but his organisation was concerned that senior figures had not been held to account in the past.

"In general, we are dealing with acute corruption," he said. "We need to see the law being enforced in high-level places."

Olmert admitted on Thursday to taking cash from an American businessman to fund personal election campaigns over a decade. Judicial sources say prosecutors believe the sums involved totalled hundreds of thousands of dollars.

Lawyers say Israeli politicians must declare all donations and adhere to strict limits on the amounts they can accept -- as little as 500 shekels ($144) per family.

Police have not outlined what charges they might consider in Olmert's case but only that they suspect he "received sums of money unlawfully".

In the case of Omri Sharon, a member of parliament jailed this year, prosecutors' case rested on the fact he failed to declare campaign donations. They did not prove any corrupt granting of favours on the part of him or his father, then prime minister Ariel Sharon who now lies in a long-term coma.

"TOO MUCH FOG"

Legal experts point to grey areas in campaign funding law, particularly for local elections and primaries.

"At this point, there is too much fog," said Menachem Hofnung of Jerusalem's Hebrew University, who has researched Israeli political financing, when asked about what Olmert had said he had done.

"The fact he received funds doesn't mean they are bribes."

Some experts say that in the modern age of expensive election strategies, Israel's financing laws are too strict, forcing politicians to turn to unscrupulous methods.

"The campaign laws are draconian," said a former adviser to Sharon, who spoke on condition of anonymity. "If you want to run an effective campaign, you have to circumvent the law."

According to watchdog Transparency International, Israel ranks below Britain, France and the United States in terms of public corruption -- but does better than the likes of Italy and most of its neighbours in the Middle East.

Israeli anti-corruption campaigners, however, say they are concerned at how often allegations of graft are levelled at very senior public officials.

They say lax or sharp practice has thrived for decades because politicians and voters focus on the issue of state security or on whether to pursue peace with the Palestinians rather than concentrating on clean government.

"There are many very ethical people in Israel but at the ballot box, it's about your own life and security," said MQB's Kayros. "Politicians know they don't have to offer good governance, because if they take the right stand on the West Bank or talks with the Palestinians they'll get your vote."

Many Israelis are deeply disenchanted with leaders they view as mired in graft, but express little hope for cleaner politics.

"Olmert is a slick lawyer and he will get out of affair like he did in other cases. He will say that Iran is getting strong and everyone will forget about it," Adam Haisraeli, a 31-year-old social worker.

"He is not fit to be prime minister, but the problem is that there is no one worthy to replace him. Everyone is seen as corrupt and opportunistic." (Additional reporting by Avida Landau and Adam Entous; Editing by Alastair Macdonald and Mark Trevelyan)

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