Germany has offered to free three prisoners in return for information on the missing Israeli airman Ron Arad, a source has told BBC News Online.
Israeli pilot Ron Arad has been missing since 1986
He said the prisoners, two Lebanese and an Iranian, were currently serving life sentences in Germany.
German officials mediated a deal, made public on Saturday, in which 400 Arabs held in Israel are to be swapped for an Israeli held by Lebanese militants.
They refused to comment on the latest information received by the BBC.
Israel's Haaretz daily has also reported that Germany is to release three prisoners.
It said on Monday that Germany had asked Switzerland and France to do the same.
The prisoner swap has been criticised in Israel because Saturday's announcement did not include Mr Arad, an Israeli air force navigator, who was shot down over Lebanon in 1986.
Israel believes he is still alive and being held in Iran.
The negotiations on Mr Arad would constitute the second stage of the prisoner exchange deal between Israel and the Lebanese militant group, Hezbollah.
"They had to break the deal into two because the Arad issue is so controversial in Israel," the BBC source said.
Elhanan Tannenbaum was seized in October 2000
Under the deal, Israel has promised to release 435 Arab prisoners - 400 Palestinians, 23 Lebanese and 12 nationals of other countries.
It has also agreed to release a German convicted of spying for Hezbollah, to return the bodies of 59 Lebanese buried in Israel and to provide maps of landmines laid by the Israeli army in Lebanese territory.
The Lebanese prisoners include guerrilla leaders Sheikh Abdul-Karim Obeid and Mustafa Dirani, who were seized inside Lebanon by Israeli commandos in 1989 and 1994 to be used as bargaining chips in exchange for information Mr Arad.
In return, Hezbollah will hand over Israeli businessman and reservist Colonel Elhanan Tennenbaum, who was lured to Beirut in 2000, and the bodies of three Israeli soldiers.
The deal took BND, the German intelligence agency, three years to negotiate.
"I understand the second stage is expected to be concluded in three months," the source said.
"At this stage, in addition to the Germans releasing three prisoners, Israel will free Samir Kuntar, a high-profile Lebanese militant serving a 540-year prison sentence for the murder of Israeli civilians.
"That is, if there is reliable information on Ron Arad."
Hezbollah leader Sheik Hassan Nasrallah said on Sunday that a second stage of negotiations would deal with the fate of Mr Arad, and four Iranian diplomats kidnapped in Lebanon in 1982 during the Israeli invasion.
He did not mention any concessions from Germany, or other countries.
He also denied suggestions that Ron Arad was being held in an Iranian prison.
Israeli soldiers began exhuming on Monday the bodies of the 59 Lebanese militants to be returned this week.
They were all buried in a "cemetery for enemy dead" in northern Israel.
Israel is also trying to finalise the list of prisoners to be released.
The list is due to be published late on Monday or early Tuesday to allow for last-minute appeals to the High Court ahead of the exchange due to start on Thursday.
The deal has been criticised by some right-wing Israeli politicians who have argued that it could strengthen Lebanese and Palestinian militants.
Prime Minister Ariel Sharon said his government had made a "correct and moral decision".