The Cabinet agreed Sunday to release scores of Palestinian prisoners as a gesture to Egypt (search) and the Palestinian leadership ahead of next month's Palestinian elections, Israeli officials said.

The release would be the latest sign of warming relations between the two sides in the wake of Yasser Arafat's (search) death Nov. 11.

Also Sunday, the ruling Likud Party (search) conferred with potential coalition partners as Prime Minister Ariel Sharon moved to strengthen his minority government in advance of his planned pullout from the Gaza Strip next year.

The prisoner release was part of a pact with Egyptian President Hosni Mubarak. That accord resulted in the release last week of six Egyptian students in exchange for the return of Azzam Azzam, an Israeli jailed by Egypt on espionage charges.

The new release, which could involve 100-200 of the 6,000 Palestinian prisoners in Israeli jails, would only include those not involved in the killing of Israelis and who had served most of their sentences, government spokesman Raanan Gissin said.

While the release was mainly a gesture of goodwill to Mubarak, "it shows also our intention to change the general atmosphere and to move forward with the (peace) process," Gissin said, adding that more prisoners could be freed in the future.

"We shall be willing to consider additional releases if we see that there is development and real steps taken by the Palestinian Authority to bring about a cessation of violence, terrorism and incitement," he said.

Palestinian officials said Israel should coordinate prisoner releases with them. "Usually, the unilateral releases have never been satisfactory," Cabinet Minister Saeb Erekat said.

Palestinians criticized Israel's release of several hundred Palestinian prisoners in August 2003, saying the group was too small and included no top militant leaders.

Ending preliminary talks Sunday, both Likud and Labor party officials expressed expectations of reaching a coalition deal quickly. Sharon needs Labor to bolster his minority government after hard-liners abandoned him over his disengagement plan.

Under the plan, Israel would withdraw troops and 8,800 Jewish settlers from Gaza and four settlements in the northern West Bank.

"It appears that with great efforts there should be a new government next Monday," Labor lawmaker Haim Ramon told Army Radio. "There will be a government. There's no dispute over this."

Likud chief negotiator Yoram Rabad told Israeli media an agreement could be reached in less than a week.

Likud also began talks Sunday with Shas and planned to meet with another religious party, United Torah Judaism. The move would placate Likud rebels, who see those parties as more aligned with the traditional Likud platform than the moderate Labor Party.

The political maneuvering came amid renewed optimism about stalled peace prospects since Arafat died, but serious movement was unlikely before the Jan. 9 election to choose Arafat's successor.

Interim Palestinian leader Mahmoud Abbas, the candidate of Arafat's Fatah movement, is considered the front-runner. Jailed uprising leader Marwan Barghouti, however, has received strong support in polls, though he is under increasing pressure to withdraw.

Barghouti's lawyer, Khader Shkeirat, met with him Sunday in his Beersheba prison to discuss his candidacy. An announcement was expected later in the day.

Meanwhile, Palestinian officials said the Israeli army fired three tank shells at the Khan Younis refugee camp in southern Gaza, moderately wounding five children and lightly wounding two others.

The army denied firing shells, saying it used only light weapons to target militants attempting to launch a mortar shell.

The attack came after militants fired a mortar shell and several rockets at a settlement in the southern Gaza Strip, causing no damage or injuries, the army and settlers said.

Palestinian militants also fired several mortar shells and homemade rockets at Jewish settlements in northern and southern Gaza on Sunday, damaging a building in the settlement of Nissanit, but causing no injuries, the army said.

In Cairo, the six Egyptian students Israel swapped for Azzam shared breakfast and a "welcome home" cake with Egyptian Prime Minister Ahmed Aboul Gheit. Israel had jailed the six in August for allegedly infiltrating with plans to kidnap Israeli soldiers. The students said after their release that they had lost their way at the border.

On Sunday, a smiling Gheit told the students to watch where they wander.

"Welcome back, we are proud to have you back — but don't do that again," he joked.