By Jeffrey Heller

JERUSALEM (Reuters) – Defense Minister Ehud Barak called a surprise news conference on Wednesday and Israeli Army Radio said he would demand Prime Minister Ehud Olmert step aside after damaging testimony in a corruption case.

The unsourced radio report said Barak would threaten to take immediate action to force an early election if Olmert did not do so.

Barak’s Labour Party, Olmert’s biggest partner in a fragile ruling coalition, could bring down the government if it walked out. A new election would disrupt Israel’s peace talks with the Palestinians and its indirect negotiations with Syria.

“Either Olmert suspends himself or the Labour Party must leave the government,” senior Labour legislator Danny Yatom said before Barak’s news conference, scheduled for 1:30 p.m. (6:30 a.m. EDT).

U.S. businessman Morris Talansky testified on Tuesday that he gave Olmert $150,000 in cash-stuffed envelopes, including personal loans that were never repaid, over a 15-year period before the veteran politician became Israel’s leader.

Israeli media reports said Barak, who did not make good on a threat to end his political partnership with Olmert after the costly 2006 Lebanon war, would say the prime minister could not do his job properly while under the current cloud of scandal.

Even in a country where many assume corruption at the top is rampant, the image painted in court of a politician with a penchant for expensive cigars and for cash over checks offered by the American Jewish fundraiser was extraordinary.

Olmert, whose defense attorneys will cross-examine Talansky only in July, has acknowledged receiving money from the New York-based businessman but said the funds were legal election campaign contributions.  Continued…