If the Jewish state were to annex all of the Jordan Valley, which is dotted with small settlements, it would leave a future Palestinian state on the West Bank entirely surrounded by Israel and without a direct link to neighbouring countries.

The interview was to be broadcast late last night. Channel 2's political affairs reporter, Nissim Mishal, told Army radio that Mr Olmert, who is favourite to win next month's general election, also plans further unilateral withdrawals similar to the settler pullout from Gaza last summer.

"He talked about Israel having to maintain a Jewish majority in the state of Israel, meaning that we have to create a new border, what is called final borders. He knows that we can't negotiate with Hamas. So the only conclusion that can be derived from this is that, in order to reach final borders, Israel will have to carry out additional [unilateral] withdrawals," said Mishal.

Mr Olmert said he intends to annex the three main settlement blocks of Ariel, Gush Etzion and Maale Adumim as well as the Jordan Valley, the TV station said. The pressure group Peace Now estimates 185,000 of the 244,000 Israelis in the West Bank outside Jerusalem are resident in the settlements Mr Olmert wants to keep within Israel's border.

That would mean removing about 60,000 settlers, many more than were forced out of Gaza. On Monday the defence minister, Shaul Mofaz, said the government was considering unilaterally imposing the borders of a Palestinian state.

"If we won't be able to reach agreed-upon borders, we will operate in a different way, which it is not appropriate to detail now ... we don't need to wait for someone else to impose our fate," he said. "In the coming years, and I'm talking about a few years, the final borders of the state of Israel will be set down, and the future of most of the settlements in [the West Bank] and the Jordan Valley will be decided in these two years."

Yesterday Mr Mofaz said Israel would keep targeting Palestinian armed groups, hours before an air strike killed two men in Gaza said by the army to be al-Aqsa Martyrs Brigades members responsible for firing rockets into Israel.

Israel has killed nine Palestinians this week, mostly Islamic Jihad and al-Aqsa members, in response to rocket attacks, one of which injured a baby. The army also killed an Islamic Jihad activist in Nablus yesterday. Buildings in Israel were damaged yesterday by rockets from Gaza. The army struck a bridge and shelled roads to try to stop rockets being moved to launch sites.

The main target of the plan will be the US earth-moving equipment company Caterpillar which has supplied vehicles used by Israel to demolish Palestinian homes. When the worldwide Anglican communion called for such a move, at a meeting last summer, there followed protests from Israel and Jewish groups. The church currently invests about £2.5m of its £900m share portfolio in Caterpillar and had been engaged in negotiations with the company about its activities. Caterpillar insists it has not provided the earth movers directly to Israel but to the US military which sold them on.

So passionate was the debate that it squeezed out an equally contentious decision last Friday by the Church commissioners, managers of the church's investment and property portfolio, to sell off the century-old Octavia Hill housing estates for more than 1,000 poor tenants in south London to property developers.

On the first day of its meeting in London, the general synod, the church's parliament, heard denunciations of Israel's use of the machines from one of its own bishops and from the Anglican bishop of Jerusalem, who is Palestinian, whose letter was read out.

The Rt Rev John Gladwin, Bishop of Chelmsford, who is chairman of Christian Aid, told the meeting that the problem in the Middle East was the government of Israel rather than Caterpillar but that it was vital that the church should invest only in organisations which behaved ethically.