JERUSALEM -- Israeli Prime Minister Ehud Olmert has spurned a call by his defense minister to consider halting excavations near Jerusalem's most sacred Islamic shrine that have angered Muslims, an official said on Thursday.

The dig, outside a compound housing the Dome of the Rock and al-Aqsa mosque, has exposed the depth of Arab suspicions over Israeli activities in Arab East Jerusalem and the simmering tensions between Olmert and Defense Minister Amir Peretz.

Arab states have asked Israel to halt the work at Islam's third holiest shrine, charging it could damage the mosque's foundations. Palestinian militants have threatened to end a three-month old Gaza truce with Israel.

Israel said the holy places would not be harmed by what it called an attempt, mandated by law, to salvage artifacts before construction of a pedestrian bridge leading to the complex known to Muslims as al-Haram al-Sharif and to Jews as Temple Mount.