"A thorough examination of the matter would reveal that nothing about the work under way will harm anyone, and there is no truth in the contentions against the work," the Ha'aretz newspaper quoted Olmert's office as saying.
Arab states have said the work could damage al-Aqsa's foundations.
For years the Islamic Movement has waged a campaign to "save" al-Aqsa, the main mosque in a compound in Israeli-occupied and annexed east Jerusalem.
The compound is known to Muslims as Haram al-Sharif and to Jews as the
The mosque is the third holiest site in Islam.
The Israeli defence ministry did not immediately comment on Thursday's report and Olmert's office was not available for a response.
Tensions have flared between
Palestinians said a ceasefire in
Ha'aretz said Peretz wrote to Olmert on Wednesday calling for the immediate stop to the work, citing security concerns.
The Fatah faction of Mahmoud Abbas, the Palestinian president, said any damage caused to the mosque by the dig work would "lead to a termination" of a November ceasefire deal operating in
"I turn to Olmert to think anew," Sheikh Abdallah Nimr Darwish, head of
"Whoever wants to speak about peace does not excavate anywhere in the area around the holy al-Aqsa mosque," Darwish said, referring to Olmert's planned February 19 peace talks with Abbas and Condoleezza Rice, the US secretary of state. Agencies