At one stage in the talks yesterday Ehud Barak, the Israeli Prime Minister, threatened to break off negotiations but later sent a cabinet minister to resume talks. Palestinian officials said Mr Barak sent a message to Yasser Arafat, the Palestinian leader, apologising for "the language of the statement which insinuated a threat".
Talks broke off earlier in the day because of a dispute over the number of prisoners to be released. Saeb Erekat, the chief Palestinian negotiator, said: "We are demanding that 400 prisoners be released and they will only accept 350."
Mr Arafat struck an optimistic note "We hope we will see progress towards reaching a conclusion of the present negotiations. I hope possibly in the next few hours." If a deal is agreed, he and Mr Barak will sign an agreement in Alexandria today in the presence of the Egyptian President, Hosni Mubarak, and Madeleine Albright, the US Secretary of State.
After talks came close to breakdown in the early afternoon, Mr Barak sent Haim Ramon, the Israeli minister for Jerusalem affairs, to meet Mr Erekat and Mohammed Bassiouny, the Egyptian ambassador to Israel.
The new deal is a modified version of the Wye accord, signed but not implemented by Benjamin Netanyahu, Israel's former prime minister, in October. Under its terms Israel was to stage further withdrawal from the West Bank, open two safe passages between Gaza and the West Bank and allow construction to start on Gaza port.
The controversy in Israel over the release of Palestinian prisoners is likely to be heightened by a claim from Hamas, the Islamic militant organisation, that it was responsible for the murder of two Israeli hikers in a forest in the north of the country earlier in the week. In the last two weeks Palestinian police have arrested 90 Hamas activists in an attempt to prevent threatened attacks.
Once the Wye agreement is carried out Israel and the Palestinians will start to negotiate final status terms under the Oslo accords. This means tackling the most divisive issues such as Jerusalem, the 3.8 million Palestinian refugees, Jewish settlements on the West Bank and in Gaza, Palestinian statehood and final borders.
Mr Ramon said yesterday that "from my point of view the Palestinian state already exists. The only question is the kind of relationship between Israel and the Palestinian state". However, he did not think that there could be any resolution of differences on Jerusalem or Palestinian refugees. He said Israel would not compromise its full sovereignty over the city. On the question of the borders of the new Palestinian entity Mr Ramon said he thought it could be 70-80 per cent resolved. He appeared to confirm reports that Israel was willing to offer recognition of a Palestinian state in return for a delay in talks on refugees. This is unlikely to be acceptable to Mr Arafat.
Meanwhile, in Lebanon a roadside bomb planted by Hizbollah, the Lebanese Islamic guerrillas, killed three members of the pro-Israeli South Lebanon Army in the Israeli-occupied zone in south Lebanon.