The first 500 could be released soon after the summit in Sharm El Sheikh but the release of a further 400 is likely to be dependent on the new Palestinian leadership taking active steps to prevent future militant violence, Israeli officials said.
The decision, which officials projected as a "painful concession" that followed an intense debate among cabinet ministers, was given a cautious welcome by Palestinian allies of Mr Abbas who had pressed for prisoner releases as one of a series of essential pre-conditions of a lasting ceasefire.
Israel gave no immediate details of the type of Palestinian prisoners, about 8,000 of whom are in Israeli jails, to be released or the length and proportion of sentence they would have served before being regarded as eligible for release. The Palestinian Authority (PA) had asked for 1,000 prisoners to be swiftly released as a first step - including some detained for militant acts of violence.
One unnamed cabinet minister told Haaretz that prisoners who had "blood on their hands" because of acts against Israel would not be released. But another source said that while it was unlikely those held during the current four-and-a- half-year intifada would be set free, it was possible that some who had killed Israeli soldiers - as opposed to civilians - might be included in the programme.
The decision appears to be a further step in the process of entrenching the still highly fragile de facto ceasefire negotiated in principle almost a fortnight ago by Mr Abbas with the armed factions. Others include a halt to targeted killings of militants and a regime under which the pursuit of militants suspected of being about to commit violent acts would have to be explicitly referred to army and intelligence chiefs.
The ministers also agreed to what appears to be a gradual handover of security to the PA in five West Bank cities. Mr Sharon was said to have emphasised that the moves were not to replace the PA's obligations to start dismantling "the infrastructure of terrorism" under the road-map but to strengthen its ability to fulfil them.