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By Corinne Heller and Adam Entous

JERUSALEM, Dec 23 (Reuters) - Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas held their first formal talks on Saturday and agreed to try to revive peace negotiations that collapsed in 2000, officials said.

Olmert told Abbas he would unfreeze $100 million in withheld tax funds and remove some checkpoints in the occupied West Bank, but no breakthroughs were made on freeing Palestinian prisoners or extending a shaky Gaza ceasefire to the West Bank, they said.

In the first formal talks between Israeli and Palestinian leaders in nearly two years, Olmert and Abbas agreed to hold a series of meetings in the coming months with the goal of trying to revive peace negotiations, aides said.

A Palestinian uprising erupted soon after the last talks collapsed, and hopes of reviving them appeared all but dead when the Hamas Islamist movement took power in Gaza and the West Bank in March.

Olmert has been under pressure from the United States and the European Union to take steps to support Abbas since he called for early Palestinian elections, a move that Hamas has rejected as a "coup" and unconstitutional.

It remains to be seen whether Olmert's gestures would be substantial enough to boost the moderate Abbas in his confrontation with Hamas, which seeks Israel's destruction.

"We do not want to raise the expectations of our people," senior Abbas aide Saeb Erekat said after the two leaders met for two hours at Olmert's Jerusalem residence.

Olmert agreed to release $100 million in withheld Palestinian tax revenues, though it was unclear to whom it would be transferred and how quickly.

Erekat said the money would be given to Abbas's office. Olmert's spokeswoman, Miri Eisin, was noncommittal, saying Israel preferred to find a way to deliver the money directly to Palestinians in need.

Israel is withholding nearly $500 million in Palestinian tax revenues, money that would normally be used by the Palestinian Authority to pay government workers.

"The money itself will not be transferred to the Hamas-led government and right now we are looking for the right way to be able to transfer the money ... for different humanitarian issues," Eisin said.

Abbas hoped to use any freed up tax revenues to pay government workers, who have not received full wages since March.

Advancing the peace process could help Olmert, whose popularity in Israel plummeted after the Lebanon war.

PRISONER RELEASE

The leaders agreed to form a committee to work out criteria for freeing Palestinian prisoners. Olmert has said he would be willing to release many Palestinians, including long-term detainees.

But Israeli officials said there would be no releases until militants in Gaza freed Corporal Gilad Shalit, an Israeli soldier who was seized in a cross-border raid in June.

"At the moment there is no talk of release of prisoners until Shalit is released," Eisin told reporters.

Shalit's kidnapping prompted Israel to launch a five-month offensive in Gaza that ended with a shaky truce in November.

Eisin said that if the Palestinians could end violations of the truce, discussions could begin on extending it to the West Bank. Palestinian militants in Gaza have fired some 50 rockets at the Jewish state since the Nov. 26 ceasefire.

Erekat said Olmert agreed to the removal of some roadblocks in the West Bank within two to three days, though few details were made public.

Abbas and Olmert met informally on the sidelines of a conference in Jordan earlier this year, but the Palestinian president's last formal meeting with an Israeli prime minister was in February 2005 when Ariel Sharon held the post.

Olmert replaced Sharon as prime minister in January after Sharon suffered a massive stroke.

At the start of Saturday's meeting, Olmert and Abbas smiled as they exchanged handshakes and kisses on the cheek.

Abbas's decision to call fresh parliamentary and presidential elections has ratcheted up tensions in Gaza and the West Bank between his forces and those loyal to Hamas.

Officials had worked for months to prepare a meeting between Olmert and Abbas to move the peace process forward. News of the gathering was announced only hours before the leaders met. (Additional reporting by Wafa Amr in Ramallah)

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