By Jonathan Saul

JERUSALEM, April 15 (Reuters) - Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas meet in Jerusalem on Sunday, but aides are playing down the chance of any breakthrough.

The talks will be the first between Olmert and Abbas since they agreed, during a visit by U.S. Secretary of State Condoleezza Rice last month, to meet every two weeks.

Olmert aides said he was prepared to discuss the legal, economic and governmental structures of a future Palestinian state in the meeting with Abbas.

But Israeli officials said three key issues -- defining the borders of a Palestinian state, the status of Jerusalem and the fate of Palestinian refugees -- would not be on the agenda.

U.S. officials said last week Israelis and Palestinians could start to explore fundamental peace issues this summer despite myriad obstacles. Washington has pushed Israel to help create a "political horizon" to give Palestinians hope of statehood.

Olmert has said that Abbas's power-sharing partnership with Hamas Islamists and the continued captivity of an Israeli soldier, Gilad Shalit, seized by militants in Gaza 10 months ago, meant that no real progress towards Palestinian statehood could be made in their face-to-face meetings.

David Baker, an official in Olmert's office, said the prime minister would raise Israeli "security concerns" including Shalit and humanitarian issues with Abbas."They will also be talking about the political horizon which means what a future Palestinian state would look like," Baker said.

CAPTIVE SOLDIER

A deal on Shalit could be key to any progress in talks between Olmert and Abbas. Shalit was seized last June by militants from Hamas and two other armed groups who tunnelled into Israel from Gaza. Israeli officials have said Abbas was not able to resolve the issue.

Hamas spokesman Fawzi Barhoum dismissed the meetings as "useless". "We should not give the occupation (Israel) the chance to improve its image by these photo opportunity meetings,"he said.

Hamas, which dominates a Palestinian unity government, refuses to meet demands by the Quartet of mediators to recognise Israel, renounce violence and accept past interim peace deals. Deputy Palestinian Prime Minister Azzam al-Ahmad from Abbas's Fatah faction said: "If everything is frozen until Shalit is freed, I don't understand what they will be discussing."

Senior Abbas adviser Saeb Erekat said: "We should not expect this one meeting to perform miracles."

Israeli officials said there could be agreement between Olmert and Abbas on setting up joint teams to work on the structure of a future Palestinian state. This also included the size of Palestinian security forces and what kind of weapons they would be assigned, they added.

Abbas is pushing for Olmert to hold talks based on a land-for-peace initiative proposed by Arab states. (Additional reporting by Wafa Amr in Ramallah, Nidal al-Mughrabi in Gaza, Jonathan Saul and Adam Entous in Jerusalem)

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