JERUSALEM, July 25 (Reuters) - Israel is proposing new talks with the Palestinians about "an agreement of principles" that could establish a Palestinian state on 90 percent of occupied territory, the Haaretz daily newspaper reported on Wednesday.

The report came as Western leaders were working to renew peace talks and as the Quartet of Middle East power brokers' new envoy, Tony Blair, wrapped up talks in the region where he said he saw a "moment of opportunity" for peace.

Blair is set to fly on to the Gulf on Wednesday, when the foreign ministers of Egypt and Jordan arrive in Israel to promote an Arab League peace proposal.

Israeli officials said earlier this week Olmert was ready to discuss core issues of Palestinian statehood such as borders and Jerusalem in "general terms", but still held it was premature to start detailed final status negotiations.

The Haaretz newspaper said that while Olmert wanted to discuss Palestinian institutions and economic issues with Western-backed Palestinian President Mahmoud Abbas as first stage, he hoped to move on to a discussion of borders.

Under the so-called principles the sides could agree to, a Palestinian state could be built on some 90 percent of land in the Gaza Strip and the occupied West Bank, the newspaper said.

The sides had discussed a similar deal in peace talks that broke down during violence in 2001.

Israel would also propose linking the West Bank to coastal Gaza with a tunnel, and a territorial exchange that would permit the Jewish state to keep major Jewish settlement blocs in the land it captured in a 1967 war, the newspaper said.

The United States has been pressing Israel to move ahead to negotiations on border issues with Abbas, who dismissed a unity coalition with Hamas last month after the group seized control of Gaza, and has set up his own administration in the West Bank.

Blair, the former British prime minister, said on Tuesday during his two-day trip to Jerusalem and the West Bank he had come mainly "to listen and to learn and to reflect", but would return for more talks in early September.

"I think there is a sense of possibility at the moment. I think this is a moment of opportunity," Blair said after meeting Palestinian Prime Minister Salam Fayyad, named by Abbas last month, in the West Bank town of Ramallah. (Additional reporting by Adam Entous in Jerusalem)

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