Egyptian officials have told Palestinian militants meeting in Cairo not to leave without reaching agreement on a ceasefire with Israel.
Renewed violence wrecked a previous ceasefire
Egypt's chief mediator said the talks aimed to achieve a proposal Israel would feel unable to reject.
Palestinian Prime Minister Ahmed Qurei, meanwhile, said he will join in the negotiations at the weekend.
As the talks began, Israel moved ahead with plans to build new homes in a Jewish settlement on the West Bank.
The government invited bids for plots of land in Ariel, the second largest Jewish settlement in the West Bank, but Palestinians said the step threatened to undermine the Cairo talks.
"We urge the Israeli Government at the time we are about to engage in serious dialogue in Cairo and are preparing for a meeting of the two [Israeli and Palestinian] prime ministers to stop unilateral acts of settlement expansion," said Palestinian minister Saeb Erekat.
Demands on Israel
Twelve Palestinian factions, which have carried out scores of suicide bombings and other armed attacks against Israel, began truce talks scheduled to last three days on Thursday.
The BBC's Paul Wood in Cairo says Egypt's chief of intelligence, who is hosting the talks, was quoted by one participant as saying "the aim was to come up with a proposal that the Israeli side would feel compelled to commit to".
Delegates are reportedly considering two proposals: one, to halt attacks inside Israel, but not in the West Bank or Gaza; the other, a more comprehensive ceasefire, conditional on Israeli concessions.
Israel has signalled a willingness to scale back military operations in the West Bank and Gaza if a Palestinian ceasefire is declared.
"It's certainly not out of the question that Israel will agree to restrain its military activity," Deputy Defence Minister Zeev Boim told Israel Radio.
But Zalman Shoval, an adviser to Israeli Prime Minister Ariel Sharon, said any ceasefire must be followed by the dismantling of the militant groups.
"Israel welcomes a ceasefire, but it must be the first step," he said.
Last August, the main Palestinian militant groups suspended a unilateral truce after Israel killed a Hamas co-founder in retaliation for the suicide bombing of a Jerusalem bus that killed 21 people while the truce was still technically in effect.
Meanwhile, the authors of the unofficial Geneva Plan for Middle East peace have begun lobbying for support in Washington.
GENEVA ACCORD: MAIN POINTS
Israeli withdrawal from almost all West Bank and Gaza
Establishment of a Palestinian state
Shared sovereignty over Jerusalem
Israel to decide how many Palestinian refugees to accept
The two ex-ministers - one Israeli and one Palestinian - will meet US Secretary of State Colin Powell on Friday.
Israel has rejected the plan, while Palestinian leaders have voiced only lukewarm support.
The US administration is still committed to the official peace plan known as the roadmap.
A White House spokesman described Mr Powell's planned talks as "all part of the ongoing engagement and efforts in the Middle East".