Israel plans to release 250 Palestinian prisoners by the end of the week, Prime Minister Ehud Olmert told Palestinian president Mahmud Abbas as the two leaders met in Jerusalem on Monday.

The prisoners, the vast majority of them from Abbas's Fatah party, are due to be released on Friday following Israel's pledge to free them as a goodwill gesture to Abbas following the bloody Gaza take-over by rival Hamas.

"The ministerial committee will convene tomorrow to go over the list of 250 prisoners which has been drawn up by the Israeli security services," a senior Israeli official quoted Olmert as telling Abbas.

"And once it is approved, the prisoners will be released on Friday unless there are legal steps taken against the release," he said.

Israel pledged to release the prisoners as a gesture to Abbas, one of several steps taken to bolster the moderate leader after security services loyal to him were overrun in Gaza by fighters from Hamas a month ago.

But while welcoming the release, the Palestinians said the freeing of 250 prisoners out of the more than 11,000 currently held in Israeli jails was not enough.

"The president demanded that political leaders be included among them," chief Palestinian negotiator Saeb Erakat told reporters in Ramallah after the encounter, the sixth official meeting since Olmert took office in May 2006.

The prisoners include 11 minors, with the rest adults who have at least a year left to serve in their sentence, and all will have to sign a "commitment not to be involved in terror," the Israeli official said.

Olmert insisted that Abbas, who has ruled out dialogue with Hamas in the wake of the bloody Gaza take-over, not re-engage with the movement, saying this "means blowing up the current peace efforts."

Other recent Israeli steps have also included a pledge to take off wanted lists nearly 190 militants who had promised not to wage anti-Israel attacks and allowing veteran Palestinian nationalist leader Nayef Hawatmeh to enter the West Bank for the first time in 40 years.

Israel has also released some Palestinian custom duties that it has withheld for more than a year after Hamas came to power.

The Palestinians, however, have insisted that talks between the two sides should focus on long-term issues, like borders, instead of gestures.

"There are certain disagreements. The president wants his meetings with the Israeli prime minister to focus on political negotiations, the Arab initiative" and steps toward establishing the Palestinians' long-promised state, Erakat said.

Palestinian prime minister Salam Fayyad warned Israel it had to be willing to discuss substantive issues if the stalled Middle East peace process were to move ahead.

"To give confidence to the Palestinians in the peace process, you have to deal with long-term and short-term issues at the same time," he said in an interview with the Haaretz newspaper, excerpts of which were published on Monday.

Fayyad said although recent gestures by Israel were important, it would be a "pathological" mistake to focus talks on these issues exclusively.

Israel's main ally the United States welcomed the prisoner release ahead of an expected statement by President George W. Bush in which he is due to outline new economic and diplomatic support for the Palestinians.

Bush would call for an international conference to be chaired by Secretary of State Condoleezza Rice "sometime in the fall" to restart Middle East peace talks, a senior Bush aide said on condition of anonymity.

The meeting would include Israel, the Palestinian Authority, and Arab countries that recognise Israel and support the creation of a Palestinian state living at peace with the Jewish state, the official said.

Earlier White House spokesman Tony Snow told reporters that "what the Israeli government is trying to do is the important business of working with President Abbas, really with the Palestinian government, in ways that are going to make it possible to work toward a two-state solution."

But in Gaza, Hamas denounced meetings "supporting the occupation."

"There is direct co-ordination between the presidency of the Palestinian Authority and the Zionist occupation," Abu Obeida, spokesman for Hamas's armed wing, told reporters.

"These meetings are absurd and we would like to see Abbas hold a dialogue with the Palestinians instead of meeting with the enemy."

In Qatar, exiled Hamas political chief Khaled Meshaal repeated the movement's call for talks with Abbas and also denied Hamas had links with al Qaeda after an Egyptian security official said the head of al Qaeda in Egypt was reported to have fled the country for the Gaza Strip.

On Monday Gaza militants fired three rockets at the southern Israeli town of Sderot, one of which hit a house, causing no casualties, medical sources said.

The attack followed a relative lull in rocket fire since the June 15 Hamas take-over in Gaza.

Meanwhile an Israeli military court ordered the release of a former Palestinian education minister in the sacked Hamas government, his lawyer said.

It ordered that Nasseredin al-Shaer be freed after ruling he no longer held a ministerial position in the Hamas cabinet Abbas sacked following the movement take-over.