Israel's Cabinet (search) narrowly approved a prisoner swap with Hezbollah (search) after eight hours of anguished debate Sunday, overriding warnings that the deal could signal weakness and encourage more kidnappings of Israelis.

Prime Minister Ariel Sharon (search) lobbied hard for the swap, which excludes Israel's most famous missing serviceman, Air Force navigator Ron Arad, shot down over Lebanon 17 years ago. The vote was one of Sharon's toughest leadership tests in three years.

The deal for the swap could still collapse -- and the Lebanese guerrilla group threatened Sunday to kidnap more Israelis if that happens.

Under the deal, about 400 Palestinians and several dozen prisoners from Lebanon, Syria, Morocco, Sudan and Libya will be released in exchange for Israeli businessman Elhanan Tannenbaum and the bodies of three Israeli soldiers. The three were abducted along the Israeli-Lebanese border in 2000.

In the West Bank on Sunday, Palestinian Prime Minister Ahmed Qureia (search) announced the formation of a Cabinet, backing down from a bitter confrontation with Yasser Arafat (search) and leaving the veteran Palestinian leader in firm control of the security forces.

Qureia's defeat in his power struggle with Arafat left him severely weakened and threatened to complicate efforts to restart talks with Israel and begin implementing the U.S.-backed "road map" peace plan.

The Palestinians have pressed Israel to release Palestinian prisoners -- though the exchange might not have an immediate effect on the Israeli-Palestinian conflict. It could further boost Hezbollah's popularity among Palestinians and reinforce a belief that Israel only responds to force.

Some Israelis believe the Palestinians have been encouraged in their uprising by Israel's withdrawal from southern Lebanon in 2000, seen by Arabs as a victory for Hezbollah's years of resistance against Israeli troops.

In Sunday's Cabinet session, the ministers voted without knowing the names of most of those to be released, but were assured that they would not have been involved in killing Israelis -- with the exception of several Lebanese prisoners on the list who killed Israeli soldiers in south Lebanon.

That restriction would presumably preclude the release of Palestinian uprising leader Marwan Barghouti, accused by Israel of a role in attacks that killed 26 Israelis. Palestinian sources have said they expected Barghouti to be released.

Palestinians reacted with disappointment Sunday.

Issa Karake of the Palestinian Prisoners Association said he had hoped those with life terms would be among those freed. "If this standard [of not having killed Israelis] is applied, the deal will lose its value because the long-serving prisoners are those who carried out operations in which they killed Israelis," he said.

More than 7,000 Palestinians are held by Israel, most of them rounded up in Israeli military raids in the past three years of fighting. Prisoner releases are a top priority for the Palestinian Authority, but the Sharon government has freed only a few hundred, most of whom were nearing completion of their terms. That helped spark the resignation of reformist Palestinian premier Mahmoud Abbas two months ago.

The Hezbollah leader, Hassan Nasrallah, has said the deal would not go through unless Lebanese militant Samir Kantar was among those freed. Kantar killed an Israeli man and his two children in the 1970s.

Israeli Foreign Minister Silvan Shalom ruled out freedom for Kantar. "Freeing him could lead to demands from other countries to free prisoners with blood on their hands, so the decision taken by Israel is the correct one."

In Lebanon, Mohammed Safa, head of a prisoners' committee, accused Israel of trying to sabotage the deal by excluding Kantar.

Mohammed Fneish, a Hezbollah legislator, said the group would try to kidnap more Israelis if the deal breaks down. "If the pressure cards we have ... are not sufficient to convince the Israeli enemy's government to respect the freedom of our detainees ..., the Hezbollah command will definitely search for means to force the Israeli enemy's government to release our detainees," he told Al Manar TV.

Sunday's vote came after an eight-hour debate, in which three security chiefs -- the heads of the army, the Mossad spy agency and the Shin Bet security service -- offered conflicting opinions.

The army chief, Lt. Gen. Moshe Yaalon, was in favor, saying the price to be paid was reasonable, while the head of the Mossad, Meir Dagan, warned the exchange would boost Hezbollah's standing in the Arab world.

Sharon brushed aside the criticism, and told ministers that the ailing Tannenbaum -- who reportedly was tortured and had all his teeth pulled by his captors -- would die in Lebanon if the deal was rejected.

However, opponents said the price is too high. "The message that will be given by a yes vote is clear, that kidnapping really pays," said Uzi Landau, a Cabinet minister without portfolio.

Israel has carried out lopsided exchanges in the past, releasing thousands of Arab prisoners for several Israeli soldiers.

The deal does not address the fate of Arad, who has become something of an icon, in contrast to Tannenbaum who was lured abroad by Hezbollah, reportedly with a promise of a lucrative business deal to help him cover gambling debts.

Arad's family campaigned heavily against the deal, and in a final push, the airman's wife and daughter gave emotional radio interviews during morning drive time just as the Cabinet ministers were heading to the meeting.

Arad's daughter Yuval, who was 15 months old when her father was captured, told Israel Army Radio her family was giving up hope of Arad returning. "My mother says there is no chance. Apparently the years and the disappointments have taught her not to hold out hope," she said before the vote.

A member of a government committee that recently investigated Arad's disappearance said Sunday the panel has seen documents indicating Arad is still alive and being held in Iran.

While Arad is not part of the deal, Lebanese guerrilla leader Mustafa Dirani, who captured the airman and reportedly sold him to Iran in May 1988, is to go free -- along with another guerrilla leader, Abdel Karim Obeid. Dirani and Obeid were kidnapped by Israeli commandos as bargaining chips for Arad.