BEIRUT, Lebanon - Lebanese Prime Minister Fuad Saniora said Wednesday that he refused to have any direct contact with Israel and Lebanon would be the last Arab country to ever sign a peace deal with the Jewish state.

"Let it be clear, we are not seeking any agreement until there is just and comprehensive peace based on the Arab initiative," he said.

He was referring to a plan that came out of a 2002 Arab League summit in Beirut. It calls for Israel to return all territories it conquered in the 1967 Mideast war, the establishment of a Palestinian state with Jerusalem as its capital and a solution to the Palestinian refugee problem - all in exchange for peace and full normalization of Arab relations with Israel.

Israel has long sought a peace deal with Lebanon, but Beirut has hesitated as long as Israel's conflicts with the Palestinians and Syria remained unresolved.

Saniora said Lebanon wants to go back to the 1949 armistice agreement that formally ended the Arab-Israeli war over Israel's creation.

Also on Wednesday, a Hezbollah cabinet minister said that the guerrilla group will not release two captured Israeli soldiers unconditionally, and that they would only be freed in a prisoner exchange.

"There will be no unconditional release. This is not possible," Minister of Energy and Hydraulic Resources Mohammed Fneish said in Beirut. He is one of two Hezbollah members in Lebanon's Cabinet.

"There should be an exchange through indirect negotiations. This is the principle to which Hezbollah and the resistance are adhering," he said.

Israeli Prime Minister Ehud Olmert said earlier Wednesday that the Israel-Hezbollah cease-fire could be "a cornerstone to build a new reality between Israel and Lebanon."

Israeli Foreign Minister Tzipi Livni and U.N. Secretary-General Kofi Annan also said they hoped the cease-fire deal could evolve into a full-fledged peace agreement between Israel and Lebanon.

Implementation of the cease-fire "gives us a foundation to move forward and settle the differences between Israel and Lebanon once and for all, to establish a durable peace," Annan said.

Also Wednesday, Saniora said that his government would pay $33,000 per house to compensate residents whose homes were destroyed by Israeli attacks. The government has been criticized for being slow to respond with financial support for people who lost homes in the fighting.

Saniora said 130,000 housing units had been destroyed or damaged in more than a month of Israeli airstrikes and ground fighting with Hezbollah guerrillas, mostly in south Lebanon. He did not give a breakdown of the completely destroyed houses.

Hezbollah launched rebuilding campaigns in its strongholds within days of the Aug. 14 cease-fire, burnishing its support among residents.

Saniora said he would ask delegates to an international donors' conference in Sweden on Thursday to take responsibility for rebuilding specific villages hit by Israeli attacks. Organizers of the conference are aiming to raise $500 million in aid for Lebanon, Sweden's aid minister said Tuesday.

The European Commission said Wednesday it will pledge $54 million at the conference on top of the $64 million that the European Union's head office has already earmarked for emergency relief to Lebanon.

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