The agreement came after Madeleine Albright, the United States' Secretary of State, met with Yasser Arafat, the Palestinian leader, in Gaza to wrap up final details. It will be formally signed tonight at the Egyptian Red Sea resort of Sharm el Sheikh.
Mr Arafat and Ehud Barak, the Israeli Prime Minister, have also agreed to negotiate a framework agreement on other issues in dispute over the next six months and reach a final peace treaty within a year.
The breakthrough came when the Palestinian negotiators climbed down from their demand that Israel release 400 Palestinian prisoners, which Mr Barak had refused to do. Haim Ramon, an Israeli cabinet minister, said the Palestinians had "at last accepted our position that only 350 would go free".
The agreement on prisoners opened the way for the signing of a modified version of the accord negotiated by Benjamin Netanyahu, the previous Israeli prime minister, at the Wye Plantation in Maryland last year. Mr Netanyahu never implemented the deal. Mr Barak has now agreed to withdraw Israeli troops from 11 per cent of the West Bank, release 350 prisoners, open two safe passages between Gaza and the West Bank and allow construction of a port at Gaza.
The final agreement on prisoners came after a day of relentless negotiating by Ms Albright. After waiting in vain in Alexandria on Thursday for Mr Arafat and Mr Barak to appear at "a festive signing ceremony", she flew to Israel for an overnight meeting with Mr Barak.
"I've never known anything like it," said one diplomat in Tel Aviv. "The Americans were adamant that they would not be drawn into negotiations between Israel and the Palestinians but they have done just that. Albright has been mediating since she got off her plane in Alexandria."
The pace of negotiations yesterday was such that at one moment the Israeli Foreign Ministry was taking reporters to a further meeting between Mrs Albright and Mr Barak which the Prime Minister's office insisted was not taking place.
Mr Arafat will face criticism among Palestinians for not insisting on the release of 400 prisoners. He will be pleased, however, that by holding fast for so long over the prisoners he forced the Americans to mediate.
Both Mr Arafat and Mr Barak needed to show their own publics that they had fought up to the last minute on the prisoner issue. Palestinians see their prisoners as martyrs, while Israelis generally resent the releases.
Gilad Sher, the chief Israeli negotiator, said last night that a second batch of 150 Palestinians would be released on 8 October and there would be two further troop withdrawals on 15 November and 20 January.
Mr Arafat has been nervous that Israel and the US would give priority over the Palestinians to negotiations with Syria on an Israeli withdrawal from the Golan Heights and Lebanon. This was meant to be the main focus of Ms Albright's visit to the Middle East, but the impasse in the Jerusalem negotiations forced her to intervene.
Ms Albright is to visit Damascus today for talks with the Syrian President Hafez al-Assad in an attempt to revive negotiations with Israel. A senior Syrian official said: "The US should persuade Israel to agree to the resumption of the talks [with Syria] from the point where they were broken off in February 1996."
Israel and Syria are in dispute over what was already agreed during past negotiations, with the Syrians insisting that they were promised the whole of the Golan Heights as it was defined before Israel captured the plateau in the 1967 war.
A Syrian official said: "The issue of the land is already settled. We are not going to renegotiate it again. Syria will not cede an inch of its lands and will never accept capitulation under any circumstances. It will not rush for a settlement if it is not a just and comprehensive one."Reuse content