Neither Israel nor the Palestinians would have sovereignty over the "Holy Basin" - a term used to refer to the area close to and including Jerusalem's Old City, home to heavily contested Jewish and Muslim holy sites.
This area would be administered jointly by Saudi Arabia, Jordan, the Palestinians, the United States and Israel.
Mr Olmert said, under the plan, a few thousand Palestinian refugees would be allowed to return to Israel, although he said this would be in recognition of the "humanitarian side" of the issue, rather than the "right to return" that Palestinians have long insisted on.
"I went a long way - longer than any government in Israel would ever go," he said.
The Palestinians made a "dramatic mistake" by not accepting the plan, he said.
Mr Olmert dismissed the fact that by the time he made the offer, he was seriously weakened by the emerging corruption allegations, and his coalition was also dependent on a party that was strongly opposed to negotiating on the status of Jerusalem.
HARDtalk asks former Israeli PM Ehud Olmert about his indictment on corruption charges
"Had the peace offer been accepted by the Palestinians... I can tell that the top leaders in the US would have signed it on the spot," he said.
"The outcome of the elections would have been entirely different," he insisted.
The Israeli electorate swung to the right in the poll which followed his resignation.
Mr Olmert's centrist Kadima party, led by Tzipi Livni, won most seats, but Benjamin Netanyahu's further right Likud Party was deemed more likely to form a coalition, and he became prime minister.
Now US President Barack Obama is pressuring Mr Netanyahu and Palestinian leader Mahmoud Abbas to restart negotiations.
Born in Binyamina in 1945
1973: Elected to the Knesset
1988-1990: Minorities minister
1990-1992: Health minister
1993-2003: Mayor of Jerusalem
Feb 2003: Deputy prime minister
2003-2004: Communications minister
Aug 2005: Finance minister
April 2006: Prime Minister
July 2008: Announced resignation as party leader
February 2009: Replaced as prime minister by Benjamin Netanyahu
Palestinian negotiators are pushing for talks to take into account the progress made under Mr Olmert.
But Mr Netanyahu has taken a hardline stance on final status issues, particularly the division of Jerusalem and the return of refugees, and only backed the notion of a Palestinian state after weeks of pressure.
Mr Olmert suggested the Palestinians do something "very smart" and even now, formally accept the peace proposal he made, regardless of Mr Netanyahu's stance.
The move "could be very embarrassing for Netanyahu," he said.
Mr Olmert is the first Israeli prime minister in history to face criminal charges and is due to appear in court on Friday.
The former prime minister said he was "absolutely certain" the corruption charges against him would come to nothing.
"I don't have to prove anything, someone else has to prove that I was wrong and I don't think they'll be able to do this," he said.
Mr Olmert is claiming to have offered the Palestinians more than former PM Ehud Barak, now defence minister, proposed during US-brokered talks with the late Palestinian leader Yasser Arafat in 2000 and 2001.
There is still disagreement over exactly which parts of East Jerusalem and the Old City - and what level of control - the Palestinians were offered, and exactly why talks at Camp David in 2000 collapsed.
An unofficial record by an EU official of talks in Taba in 2001 suggests that Mr Barak later offered the Palestinians 94% of the West Bank, plus an area equivalent to 3% of what remained as a land swap with Israel.
But those talks also failed to reach agreement and the peace process broke down amid the violence of the Second Intifada, or Palestinian uprising.
The full interview with Ehud Olmert can be seen on Monday 28 September 2009.
It will be broadcast in the UK on the BBC News Channel at 0430 2300 and on BBC World at 0330 GMT, 0830 GMT, 1430 GMT, 2030 GMT, 2230 GMT.
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