At Wednesday's meeting at a Jerusalem hotel, Olmert and Abbas set a target of December 2008 for a peace agreement that would end six decades of conflict.
But the two sides encountered troubles early during the session, which lasted just 90 minutes, with Palestinians criticizing Israel for a construction project planned in east Jerusalem and military activity in the Gaza Strip, and Israel complaining about continued rocket fire from the Gaza Strip.
"We are coming to negotiate over Jerusalem and borders, and the dictation and facts on the ground continue," Palestinian negotiator Saeb Erekat told the Associated Press. "If you want to restore the credibility of the peace process, the Israeli government must revoke this order." He said there were no immediate plans to meet again.
An Israeli official, speaking on condition of anonymity because he was not authorized to discuss the meeting with the media, cited a "tense atmosphere" and said Israel complained about ongoing Palestinian rocket fire from the Hamas-controlled Gaza Strip.
Early Wednesday, Palestinian militants fired 20 homemade rockets toward Israel, causing minor damage and lightly wounding one woman, Israeli officials said.
The rocket attack came hours after Israeli tanks and bulldozers pushed into the southern Gaza Strip, killing five Islamic militants, trapping hundreds of people in their homes and leaving behind heavy damage to the farming community of al-Fukhari.
The Islamic Jihad militant group said it fired nine of the rockets to avenge Israel's incursion. "The resistance is going to escalate the operations targeting the Zionist colonies in the coming hours," said Abu Ahmad, a spokesman for the group.
Olmert convened his security Cabinet, a group of top political and defense officials, to discuss the Gaza situation. Officials decided to continue authorizing brief incursions into Gaza, but decided against launching a broad invasion of the area.
One Cabinet member, speaking on condition of anonymity because he was not authorized to talk to the media, said officials are concerned that a broad invasion would cause heavy casualties to Israeli troops and damage the prospects for peace talks.
The U.S. State Department, which has criticized Israel for planning new apartments in the West Bank, sought to play down expectations for the talks' opening day, saying it was envisioned only as an organizational meeting.
"If they choose to address substance, then, of course, that is going to be up to them, and we would encourage them to move as fast as they are able to move together," spokesman Sean McCormack said.