Israeli Defence Minister Shaul Mofaz has said Israel is ready to transfer control of several West Bank towns to Palestinian forces in the coming days.
Palestinian forces have already taken control in parts of Gaza
Mr Mofaz and Palestinian security chief Mohammed Dahlan worked out details of the handover in talks on Saturday, which were described as 'constructive'.
Palestinian forces began taking control in Gaza last week after militants agreed to an informal ceasefire.
The lull in violence has raised hopes of renewing the peace process.
Five West Bank towns - Ramallah, Bethlehem, Tulkarm, Qalqilya and Jericho - are expected to be the first areas returned to Palestinian control. Mr Mofaz said the handover should happen in the next few days.
Israel has said it is ready to gradually withdraw from all West Bank towns and return to positions held before the start of the intifada in September 2000, said Palestinian negotiator Saeb Erekat.
"I think there is an opportunity to create a new reality," Mr Mofaz told Israel radio.
The talks between Mr Mofaz and Mr Dahlan were part of preparations towards staging a summit between Israeli Prime Minister Ariel Sharon and newly elected Palestinian President Mahmoud Abbas.
It will be the highest-level direct contact since they signed the roadmap peace plan in June 2003, when Mr Abbas was Palestinian prime minister.
Mr Sharon has praised Mr Abbas' efforts to end fighting between the two sides, and the Israeli army has ordered a scaling down of its military activities in the Palestinian territories.
On Sunday, a Palestinian man was killed by the Israeli army on the border between Gaza and Egypt, AP reported Palestinian officials as saying.
The military said the man was deep inside a no-go zone when the troops shot him, the agency reported.
On Saturday, at least 22 people were injured in Gaza in clashes between supporters of the dominant Palestinian faction, Fatah, and the radical Hamas movement.
Violence broke out at the Mughazi refugee camp over the factions' various successes in recent elections.