Palestinian militant group Hamas has agreed to a document backing a two-state solution to the conflict with Israel, officials say.
The initiative, devised by Palestinian prisoners held in Israeli jails, implicitly recognises the Jewish state.
Hamas's charter currently calls for Israel's destruction by force and rules out peace negotiations with it.
The deal comes amid heightened tension with Israel following the capture of an Israeli soldier by militants on Sunday.
Israeli tanks and troops have massed on the border and Israeli Prime Minister Ehud Olmert has warned that a large scale military operation is rapidly approaching.
"There is one soldier but there have been hundreds of Palestinians kidnapped from their houses"
Palestinian militants acknowledged for the first time on Tuesday that Israeli tank gunner Gilad Shalit was alive.
"The soldier is in a secure place that the Zionists cannot reach," said Mohammed Abdel Al, a spokesman for the Popular Resistance Committees, one of three Palestinian groups involved in Sunday's abduction.
According to Israeli media reports officials believe he was injured in the stomach and hand during the attack near Kerem Shalom.
In other developments:
Extent of shift
Palestinian officials said the agreement would be unveiled later on Tuesday by Prime Minister Ismail Haniya of Hamas and President Mahmoud Abbas, of the rival Fatah faction.
"We can announce that we have agreed on the document," Rawhi Fattouh, an aide to Mr Abbas, said. "We can say that all the barriers have been removed."
"We agreed on all the points of the prisoners' initiative," Hamas spokesman Sami Abu Zuhri was quoted by AFP as saying.
DOCUMENT KEY QUOTES
The two factions have been locked in an intense power struggle since Hamas gained control of the Palestinian parliament in elections in January.
The BBC's Alan Johnston in Gaza says that the document that Hamas and Fatah have been negotiating for weeks talks of working to end the Israeli occupation and establish a Palestinian state in the West Bank, east Jerusalem and Gaza, which would live alongside Israel.
Hamas has, up until now, always rejected any recognition of Israel, which it regards as having been founded on stolen Palestinian land.
It is not yet clear what movement Hamas may have made on this crucial issue, our correspondent says.
When the agreement is made public, the wording and the details will need to be scrutinised to see if there has been any really significant shift in Hamas' position, our correspondent says.
The US held back on praising the agreement saying that it lacked substance.
"Let's wait until we see something for real," White House spokesman Tony Snow said, insisting that if Hamas wanted to be recognised it had to renounce terror.
'Moral obligation'
News of the Hamas-Fatah agreement came as a standoff over the abduction of Cpl Shalit, who was seized by Palestinian militants in a clash on the Gaza border on Sunday, continues.
On Monday three Palestinian militant groups demanded the release of Palestinian women and youths being held in Israeli jails in return for news of the captured soldier.
Ramallah resident Walid al-Houdaly, whose wife and 18-month-old child are in an Israeli jail, told the BBC News website that he backed those calls:
"There is one soldier, but there have been hundreds of Palestinians kidnapped from their houses," he said.
Speaking to the BBC on Tuesday, Israeli foreign ministry spokesman Mark Regev said that the release of Cpl Shalit must be immediate and unconditional.
"The state of Israel does not negotiate with terrorists," Mr Regev insisted. "Unless he is released it is our moral obligation as a government to take action to free him."
"We do not want to act, but we will," Mr Regev added. "If the Palestinian leadership can convince those holding him to release him immediately this crisis that we are in will dissipate."
Intense diplomatic efforts have been under way since the soldier's disappearance, including mediation by an Egyptian delegation in the Gaza Strip.
The Israeli leader must choose between going ahead with military action that would endanger the life of the captured soldier or risk being seen as weak, says the BBC's Jon Leyne in Jerusalem.
And the Hamas-led Palestinian government must decide whether they are really willing to go into a full-scale confrontation with the Israelis which could have disastrous consequences.
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