JERUSALEM, July 21 (Reuters) - Israel will have to withdraw from "many areas" in the occupied West Bank, Prime Minister Ehud Olmert said in remarks broadcast on Saturday, part of a drive by Middle East power brokers to resume peace efforts.

"Anyone living with some kind of dream detached from reality that we can keep all the (occupied) territories, isn't making a correct assessment," Olmert said at a collective farm.

"We will have to leave many areas there," he said.

Olmert signalled Israel was willing to discuss such a settlement with the Western-backed administration of President Mahmoud Abbas, who dismissed a cabinet with Hamas last month.

Abbas's new cabinet is "a representative government with which we can negotiate", Olmert said.

His comments seemed to tone down suggestions made by Israeli officials this week that Israel was not yet ready to negotiate core issues for a Palestinian state. Middle East peace envoy Tony Blair is due to visit Israel and the West Bank on Monday.

Olmert was elected last year on a pledge to remove isolated Jewish settlements from the territory Israel captured in a 1967 war. But he later backed away from a plan to dismantle some settlements unilaterally.

Israel freed more than 250 prisoners on Friday, many of them from the Western-backed Abbas's Fatah movement, a day after the Quartet of Middle East peace mediators backed a U.S. plan to hold a Middle East peace conference later this year.

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