(Adds Olmert address, Hezbollah reaction)

By Jeffrey Heller

JERUSALEM, April 30 (Reuters) - A panel probing the conduct of Israel's war in Lebanon last year scathingly criticised Ehud Olmert on Monday but the prime minister said he would not resign but work instead to put right mistakes.

Olmert "made up his mind hastily" to launch the campaign last July against Hezbollah guerrillas, the government-appointed panel said in an interim report, accusing him of "a serious failure in exercising judgment, responsibility and prudence".

His declared aims in going to war, to free two soldiers seized by Hezbollah and crush the militant group, were "overly ambitious and impossible to achieve", the Winograd commission said of a 34-day conflict many Israelis now see as a mistake.

The two soldiers are still missing and 158 Israelis were killed, including 41 civilians caught in rocket strikes. Some 1,200 people died in Lebanon, including about 900 civilians.

A snap Israel Radio poll said 69 percent of the public believed he should quit. But a defiant Olmert went on television to tell Israelis:

"It would not be right to quit and I have no intention of doing so ... This government made the decisions and this government will deal with correcting the defects.

"I plan to act to correct all that needs fixing thoroughly and fast," added Olmert, a veteran of many governments who heads a broad parliamentary coalition. He has no clear challenger for now and said this month he was "indestructible".

The 232-page report also sharply criticised Defence Minister Amir Peretz, who like Olmert does not have a military pedigree, and the armed forces' chief of staff, who has resigned.

Hezbollah fired 4,000 rockets into Israel during the fighting, forcing a million residents into shelters in a blow to the Middle East's mightiest military. Israel sent warplanes to bomb in southern Beirut neighbourhoods, Hezbollah strongholds.

STIR SENTIMENT

The report, assigning Olmert "supreme and comprehensive responsibility" for government decisions and army operations, seemed likely to stir public sentiment against him.

His approval ratings plunged to single digits after the inconclusive war and a U.S.-initiated dialogue between the Israeli leader and moderate Palestinian President Mahmoud Abbas has shown few results.

Olmert has said the war improved Israel's security by banishing Hezbollah from its frontier strongholds and boosting a U.N. peacekeeper force in southern Lebanon.

A Hezbollah official said the report confirmed the group's "divine victory", while the Shi'ite Islamist party's television station said: "The heads of Olmert and Peretz have been placed on the guillotine. All that's left is for their heads to roll."

An Israeli rally calling for Olmert and his government to quit is planned for Thursday in Tel Aviv. The demonstration is organised by a former general, military reservists who fought in the war and parents of soldiers killed in the conflict.

Israeli political analysts, however, were divided over whether such protests would gather steam in a country where years of corruption scandals at the top seem to have led many to believe no worthy leaders wait in the wings to take charge.

The panel has not ruled out calling for Olmert or Peretz to step down in a final report due to be published in a few months.

The White House declined to comment on the findings but said U.S. President George W. Bush works closely with Olmert and considers him "essential in working toward a two-state solution" in the Israeli-Palestinian conflict.

Saeb Erekat, a senior Abbas aide, described the war inquiry as an internal Israeli affair. (Additional reporting by Allyn Fisher-Ilan and Corinne Heller)

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