The Israeli Government has voted to release a new batch of Palestinian prisoners - a gesture likely to bolster relations with Palestinian Prime Minister Mahmud Abbas, also known as Abu Mazen.
Israel has yet to decide which prisoners will be released
But Israeli Prime Minister Ariel Sharon said the move will be limited and will only proceed in tandem with a crackdown on militant groups by the Palestinian authorities.
A ministerial committee will decide who will be released from a list of 200-400 candidates drawn up by Israel's Shin Bet security services - militants and those involved in violence against Israelis will not be eligible.
Securing the freedom of prisoners is a top priority for Abu Mazen, but the proposed releases fall well short of Palestinian demands that all prisoners in Israeli custody be freed.
The BBC's correspondent in Jerusalem, Michael Voss, says a large-scale prisoner release would ease the pressure on Abu Mazen as he tries to persuade militant groups to support the ceasefire with Israel.
A breakaway Palestinian organisation, the Popular Resistance Committee, has become the latest militant group to declare its support for the ceasefire, provided Israel frees prisoners and lifts its siege of Palestinian cities.
Last month all the main groups who agreed to a temporary ceasefire did so on the condition that prisoners be released.
But Israeli officials say members of Hamas or Islamic Jihad are not included among those to be freed, a decision which could jeopardise the truce and threaten the entire peace process, our correspondent says.
Significantly the al-Aqsa Martyrs Brigades have not joined the truce
"There is no way prisoners with blood on their hands will be released," Mr Sharon told his cabinet as they approved the decision in a 13-8 vote, a senior Israeli official said.
It is reported that several hundred prisoners are to be freed in a gradual process and that they will be largely comprised of those who have been detained without trial and have only a few months to serve, people under 18 or over 60 and women.
"The release would be carried out in tightly supervised, small and measured doses in relation to proven Palestinian actions in the security sphere," Mr Sharon said.
"If terror continues and there is no genuine Palestinian effort to fight and eliminate it, the releases will stop," he added.
Palestinian security chief Mohammed Dahlan said he was disappointed that the release was so limited.
"We have discussed with the Israelis our disappointment after Israel's selective policy of releasing prisoners," he said.
Mr Dahlan was speaking after holding security talks with Israeli Defence Minister Shaul Mofaz.
Mr Dahlan and Mr Mofaz discussed Israeli plans to carry out further withdrawals from Palestinian cities, in line with the US-backed peace plan known as the roadmap.
"We will continue to transfer additional towns, step by step, according to the ability of the Palestinians and according to the results of the security activities they have taken in the areas under their responsibility," Mr Mofaz
Mr Dahlan also said they discussed the release of Palestinian activists currently in Israeli custody, and easing the travel restrictions on Palestinian President Yasser Arafat.