Mr Olmert promised to release prisoners earlier this month
The Israeli cabinet has approved the release of 250 Palestinian prisoners after an earlier promise from outgoing Prime Minister Ehud Olmert.
The prisoners, some of 11,000 held by Israel, will be freed in the West Bank.
An Israeli official said the move aimed to help bolster Palestinian PM Mahmoud Abbas's West Bank administration against Hamas, which rules in Gaza.
Israel freed 198 other prisoners in a similar move in August.
Mr Olmert made the gesture after a meeting with Mr Abbas on 17 November.
Israeli cabinet member Gideon Ezra was quoted by Reuters news agency as saying that the aim was to help Mr Abbas "earn the co-operation of the population" without harming Israel's security.
Clashes have broken out on the Israel-Gaza border
The decision also follows a temporary lifting of the blockade of Gaza earlier this month to allow deliveries of humanitarian aid into the territory.
But the prisoner release has also drawn criticism from some Israelis.
Trade and Industry Minister Eli Yishai, from the ultra-Orthodox Shas party, said it sent out the wrong message while an Israeli soldier captured in 2006 was still being held.
"Releasing prisoners time and again only weakens the chances of concluding negotiations for the release of Corporal Gilad Shalit," he was quoted as saying by AFP.
Israeli troops have been clashing with gunmen along the border with Gaza this week.
The clashes have come as correspondents say a five-month truce between Israel and Palestinian militants in Gaza is looking increasingly shaky.