Talks between Israeli PM Ehud Olmert and Palestinian President Mahmoud Abbas in the West Bank have been described by both sides as "constructive".
Mr Olmert (L) and Mr Abbas have begun meeting regularly
Broad principles for establishing a Palestinian state were discussed but no significant progress was announced.
It was the first time Israeli and Palestinian leaders had met on Palestinian territory for some years.
The session was one in a series of meetings ahead of a US-sponsored peace conference in November.
At a news conference after the three-hour talks, Palestinian negotiator Saeb Erekat said Mr Abbas had "not come to the meeting with a magic wand, and neither did Mr Olmert".
"There is an agreement on a series of meetings to discuss the issues, including the establishment of a Palestinian state," he said.
David Baker, an official in Mr Olmert's office, said: "Both sides decided to expand the contents of their discussions in order to advance the understandings... to allow further progress to be made for the establishment of a Palestinian state."
Before the talks, which took place in the town of Jericho, there appeared to be conflicting expectations.
Saeb Erekat had said that the Palestinians wished to sketch the outlines of a final peace deal and were looking to "establish the parameters" for resolving the core issues.
"Once the parameters are established, then it can be deferred to experts [for drafting]," he said.
One of the specific issues the Palestinians wanted to discuss is the reduction of military checkpoints in the West Bank.
However, Israel's David Baker had said the core issues would not be discussed.
Describing the meeting as a gesture of good will, he said it would be restricted to humanitarian aid for the Palestinians, Israeli security concerns and the institutions of a future Palestinian state.
Speaking from the Gaza Strip, Ismail Haniya, the former Hamas prime minister, dismissed the talks as futile.
Palestinians want fewer Israeli checkpoints on the West Bank
"It's clear that the meetings... are just embarking once again down a long road that has produced no result for the Palestinian people."
The BBC's Aleem Maqbool in Jericho says many people across the Palestinian territories will remain sceptical about progress being made until they feel it in their day to day lives.
Co-operation between the Israelis and the Fatah administration of Mr Abbas, centred on the West Bank, has improved since Hamas took control of the Gaza Strip in June.
The takeover has left the Palestinian territories split between the two rival factions.
Israel has been trying to bolster Mr Abbas's position, freeing some Palestinian prisoners and releasing frozen Palestinian tax revenues.
Several hundred gunmen of the Fatah-linked al-Aqsa Martyrs' Brigades have taken advantage of an Israeli offer of amnesty and have handed in their weapons to Palestinian authorities and renounced violence.
Mr Olmert's popularity has plummeted since an inconclusive war in Lebanon last year that was intended to smash Hezbollah militants.
And it is not clear whether Mr Abbas can bring Hamas, which refuses to recognise the Israeli state, in on any deal.