Israel's prime minister tried on Tuesday to temper expectations that a deal to free an Israeli soldier held by Hamas militants for more than three years was close, despite a rash of reports that serious progress has been made.

"There is no deal yet and there might not be one," Prime Minister Benjamin Netanyahu said, as contacts continued over the fate of captured soldier Sgt. Gilad Schalit and hundreds of Palestinian prisoners who would be freed if an exchange takes place.

A Hamas delegation was in Egypt on Tuesday meeting with the German official trying to finalize an agreement. Egyptian officials said a deal was close but was unlikely to be sealed in the next few days. They were speaking on the condition of anonymity because of the sensitivity of the issue.

In recent days, officials have been stoking expectations with indications that a deal was just days away.

Schalit, captured in a cross-border raid in June 2006, is being held in Gaza by militants affiliated with the territory's Iranian-backed Hamas rulers.

The Egyptian officials said they were mediating between Israeli and Palestinian officials, who were now negotiating over the names of prisoners to be released, and how many would be deported.

They said Israeli officials were showing more flexibility in the talks.

They said Hamas officials were insisting that two top imprisoned Palestinian leaders, Marwan Barghouti and Ahmed Saadat, be released.

Israeli officials would not confirm any of the information, and Netanyahu himself has warned of "distorted" reports in the media.

Continued violence between the two sides also threatened to undercut progress. Israeli aircraft attacked a suspected weapons factory and smuggling tunnels in Gaza early Tuesday in response to rocket fire the previous day by Palestinian militants. The rocket attack came despite Hamas' announcement over the weekend that other militant groups had agreed to halt their fire.

The visiting German foreign minister, Guido Westerwelle, refused to comment on the status of the negotiations. "I can simply express the hope that the talks will lead to a good and humane solution," he said during a stop in the West Bank.

In Paris, French Foreign Minister Bernard Kouchner said negotiations appeared to be "evolving in a positive direction."

Prisoner exchange deals are sensitive to both Palestinians and Israelis.

Israel holds over 7,500 Palestinians ranging from those who hurled rocks at soldiers to undertaking deadly attacks. Virtually every Palestinian family has a relative, friend or neighbor who has spent time behind bars, making prisoner releases an emotional issue.

One inmate is Nafez Haraz, who has spent 24 years in prison for killing an Israeli civilian in 1982.

"Every day we hear something different, and it creates anxiety and depression," said Haraz's wife, Sana, 48.

When he was arrested, Sana was a young mother of six children, the last born while her husband was in jail. Now they have 21 grandchildren.

The long ordeal of the soldier and his family have touched a nerve in Israel, where arguments rage between those who see prisoner exchanges as rewarding militants for taking hostages and fear a repeat of past experiences in which freed Palestinian militants carried out fatal attacks, and those who see it is the government's duty to do all they can to free soldiers in a society where military service is compulsory.

Ron Kehrmann's 17-year-old daughter, Tal, was killed in a 2003 bus bombing. On Tuesday, he and several other bereaved parents petitioned the Israeli Supreme Court to lift the censorship the military has imposed on the emerging deal.

"We want everyone to know what the price is," Kehrmann said.

The sight of hundreds of jubilant Palestinian militants, freed in exchange for a lone captured Israeli soldier, would also be hard for Rami Elhanan to see. His 14-year-old daughter, Smadar, was killed in a suicide bombing attack in Jerusalem in 1997.

But Elhanan supports a deal.

"I can understand the pain of those who don't want to release them," said Elhanan, who belongs to a group of 500 Palestinian and Israeli families who lost loved ones in fighting but champion reconciliation. But, he said, "if we know how to use it as a leverage for dialogue, then maybe something good will come out of something evil," he said.