Benjamin Netanyahu's office described the talks as "friendly"
Israeli premier Benjamin Netanyahu and Egyptian President Hosni Mubarak have held talks in Cairo to discuss the Israeli-Palestinian peace process.
Mr Netanyahu said he was "very encouraged" by the meeting, while Cairo said it had been "very positive".
The Palestinians refuse to restart talks unless Israel halts settlements.
On Monday, Israel announced plans to build 700 Jewish homes in occupied East Jerusalem, where the Palestinians want their future capital.
Before Tuesday's talks, Egyptian Foreign Minister Ahmed Aboul Gheit said Israel's settlement activity cast doubt on its willingness to reach a final deal with the Palestinians.
But after the bilateral, he said Mr Netanyahu "was discussing positions that surpass in our estimate what we've heard from them in a long time".
"I can't say that he has come with changed positions, but he is moving forward," he added.
Gilad Shalit was seized by militants from Gaza in 2006
After returning home, Mr Netanyahu told a gathering of his Likud Party he was "very encouraged by the commitment of President Mubarak to promote the peace process between us and the Palestinians".
Israel has refused Palestinian demands for a complete halt to settlement building in the West Bank and East Jerusalem, which it occupied during the 1967 Israeli-Arab war.
But it has limited building work for 10 months in the West Bank, excluding East Jerusalem.
Mr Netanyahu and Mr Mubarak also discussed the case of captive Israeli soldier Gilad Shalit, who has been held by Palestinian militant group Hamas since his capture in June 2006.
A recent flurry of activity has prompted speculation of progress on Egyptian-brokered attempts to reach a prisoner swap deal.
Hamas, which controls the Gaza Strip, wants Israel to release hundreds of its prisoners in exchange for the freedom of Sgt Shalit.
The group said a German mediator visited Gaza last week with Israel's latest offer.
But a top Hamas official in Damascus, Syria, told the Associated Press news agency that the group had refused that proposal.
The Egyptian foreign minister said he understood Hamas' opposition to Israel's refusal to free "certain" prisoners, and to Israel's demand to deport others from the Palestinian territories.
About half a million Israelis live in the West Bank and East Jerusalem, which Israel has occupied since 1967.
The settlements are illegal under international law, although Israel disputes this.