Outgoing PM Ehud Olmert says Israel must withdraw from almost all the land it occupied in 1967 if it wants peace with Syria and the Palestinians.
He said this would include parts of East Jerusalem, which Palestinians want as the capital of their future state.
Mr Olmert also said any peace deal with Syria would require an Israeli withdrawal from the Golan Heights.
He gave few further details, but said he was prepared to go beyond previous Israeli leaders to achieve peace.
"We have to reach an agreement with the Palestinians, the meaning of which is that in practice we will withdraw from almost all the territories, if not all the territories," Mr Olmert said.
"We will leave a percentage of these territories in our hands, but will have to give the Palestinians a similar percentage, because without that there will be no peace," he added.
He said the withdrawals would include Jerusalem, the eastern part of which Israel occupied and annexed after the 1967 war, but which it has long proclaimed as its "eternal, undivided capital".
Security basis
The remarks, which immediately stirred controversy among Israelis, were published in an interview with the Israeli newspaper Yedioth Ahronoth.
Former Meretz chairman Yossi Beilin said: "Olmert has committed the unforgivable sin of revealing his true stance on Israel's national interest just when he has nothing left to lose."
Meanwhile MK Yuval Steinitz accused Mr Olmert of gambling on Israel's future.
"Ignoring the distance between rockets fired from afar and the enemy sitting on top of Jerusalem reveals how little he understands the basis of security," Mr Steinitz said.
About 400,000 Israeli settlers live in the occupied West Bank and East Jerusalem. Another 20,000 Israelis live on the Golan Heights plateau.
Mr Olmert faces serious corruption allegations, and is acting as caretaker prime minister after resigning earlier this month.
Correspondents say there is little likelihood that any peace deals will be agreed in his final weeks in office.
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