Israeli Foreign Minister Tzipi Livni has met the Palestinian Prime Minister, Salam Fayyad, for the first time since Mr Fayyad took office last month.
Mr Fayyad's meeting with Ms Livni is a sign of improving relations
The meeting in Jerusalem is seen as a gesture of support for moderate Palestinian leader Mahmoud Abbas.
Israeli and Arab officials meanwhile said an Arab League delegation would go to Israel for the first time.
The visit, due on Thursday, will focus on an Arab peace plan and ways to help the beleaguered Palestinian Authority.
Israel rejected the Saudi-led peace plan when it was launched in 2002 but gave some aspects a cautious welcome when it was endorsed by Arab states earlier this year.
An Israeli statement issued after Ms Livni's meeting with Mr Fayyad said: "The discussion dealt primarily with the situation in the Palestinian Authority [PA] and the ways of improving the lives of the residents in the territories while preserving Israeli security interests."
Israeli spokeswoman Miri Eisen said her country saw the new Palestinian government as an opportunity. "This is a government which clearly has accepted the international principles - not only the recognition of Israel, but especially the renouncing of terrorism...
"So, for us, it's important to show not only our support for this government, but our capability to give to a moderate government, to show them that it's worthwhile to be moderates," she said.
An official in Mr Fayyad's office said the meeting dealt with "broader political issues, not just removing a checkpoint here and there".
On Sunday, the Israeli cabinet approved plans for releasing 250 Palestinian prisoners.
It comes three weeks after the Palestinian militant group Hamas seized control of the Gaza Strip, which split the Palestinian territories into two separately controlled entities.
PA President Mahmoud Abbas dissolved the elected Hamas-led government after the takeover and appointed Mr Fayyad as prime minister in an emergency cabinet.
West Bank death
The US and Israel have offered strong support for Mr Abbas - as has the Arab League.
Arab League delegation visits Israel for the first time
Israel to release 250 Fatah prisoners
Israel to release some of the Palestinian tax revenues it has held since Hamas came to power
The organisation is expected to send Egyptian Foreign Minister Ahmed Abul Gheit and his Jordanian counterpart Abd-al-Ilah al-Khatib to Israel.
"This is the first time the Arab League is coming to Israel," Israeli Foreign Ministry spokesman Mark Regev said.
"From its inception the Arab League has been hostile to Israel. It will be the first time we'll be flying the Arab League flag."
The BBC's Middle East analyst Roger Hardy says that, with the support of the US, Israel wants to bolster the new government of Mr Salam Fayyad in the West Bank - and draw the Arab states into a revived peace process.
Israel and the US also hope to marginalise Hamas and its rival government in the Gaza Strip.
Roger Hardy says that throughout the region there is deep pessimism about whether any of these steps are really leading anywhere.
The suspicion is that Hamas is too strong to be marginalised - and Mr Fayyad and his government are too weak to deliver either peace or security.